Weak rupee makes steel companies' import bill shoot up.

 KOLKATA: The rupee slide has raised the steel industry's import bill for key inputs such as iron ore and coal and has thus offset gains that steel companies were supposed to have enjoyed this quarter due to a softening of input prices, globally.

"Dollar sensitivity increases the cost of steel making. This has increased pressure on our margins. While in India, we can sell our products, the market is in no position to accept a price hike. In Europe and elsewhere, the weak economy has led to weak demand. Steel prices too have fallen in those regions. There is resistance to infrastructure spending abroad and consumer spends, too, have been low. Thus any gain that Indian steelmakers expected to have by pushing higher export volumes has also been hit," said Amit Agarwal, CFO, Essar Steel India.

The rupee declining to a new low of 56.2 to the dollar on Wednesday, will add to their woes. Analysts feel the largest impact will be on coal imports. "The fall in the rupee's value by nearly 20% in the last few months is mainly going to affect imports of coal by Indian companies. Since steel manufacturers mainly rely on imports of coking coal it is likely to hit them. A 15-20% dip in global input prices has been more or less similar to the fall in rupee exchange rate. For steelmakers the net gain has thus almost been wiped out," Puneet Goel, a Delhi-based independent consultant to utilities and mining firms said. But, steel makers can derive some comfort from a correction in input prices.

Incidentally, iron ore prices have corrected around 10 % in May due to weak demand from steel companies. Concerns of a Chinese slowdown and the eurozone crisis are the main factors for the correction, according to analysts.

There are reports that buyers in China are deferring iron ore deliveries on worries that situation may worsen due to lack of demand and prices may drop by another $5 per tonne in the short term. Iron ore prices in India have also fallen, as concerns of a Chinese slowdown loom large and iron ore inventory at major ports continue to rise. Prices of iron ore with Fe content of 63% and 62%, fell by 2% and 7% to $148 and $135 per tonne, respectively, over the last fortnight.

Prices of inputs have been going down on lower Chinese demand and a weak European economy. It remains to be seen to what extent the rupee depreciation impacts input costs of steel companies, Goel added.

Source : economictimes.indiatimes.com