Steel prices are going up on speculation, but poor demand may limit further rise
Sharad Matade 10 February 2011

The chief economist from the ministry of steel feels that the current price movement is due to mere speculation, and raging inflation in the country may reduce demand, which in turn will arrest further rise

After hiking prices thrice in just two months, Indian steelmakers may not go in for more price hikes, as demand is seen to be subdued in the coming quarters due to high inflation in the country. Raw material prices may also witness some correction.

"There could be a slight upward movement in steel prices, but prices would not sustain due to lack of demand for the metal, as there is a speculative rise and speculative fall. There could also be pressure from rising inflation in the country,"
Dr AS Firoz, chief economist at the Economic Research Unit of the Ministry of Steel, told Moneylife.

Since January, Indian steelmakers increased their product prices thrice in the wake of surging prices of raw materials, particularly coking coal, in the international market.

Currently, long steel prices at the Ghaziabad market are hovering at around Rs27,000 a tonne. However, prices were around Rs29,000 a tonne in the last week of January.

"We are seeing very high volatility in long steel prices. Prices of long steel are falling as demand is less for the product," a senior official from the steel division of the National Commodity & Derivatives Exchange Ltd (INDEX) told Moneylife (preferring anonymity).

"Whatever the price hikes we have seen, it's just because of a sharp rise in coking coal prices in the international market. The price hikes are not driven by demand. Somehow, prices may sustain till the end of this quarter as recovery from the floods in Queensland (Australia) is not cleared. From the first quarter of the next financial year, prices would surely remain under pressure," an analyst from a Mumbai-based research firm told Moneylife.  

Prices of coking coal in the international market have been surging everyday as the supply from the largest coking coal-producing region-Queensland-has been disrupted due to the floods. Mining & shipments have been severely affected due to the floods in the region.

Coking coal prices have crossed the $350/tonne level in the spot market. Market experts expect that the contract prices (for the next quarter) of coking coal would be sealed at around $300 a tonne.

"Steelmakers have been caught in a crucial situation. They cannot increase prices regularly, citing surging raw material prices, as it would derail demand from their consumers," said the analyst.

"If the situation improves soon, coking coal prices would come down and it may pull down prices the steel," added the analyst from the Mumbai firm.

On the anticipation of rising prices, many dealers and buyers have piled up their inventories. Now as demand is not so impressive, buyers would be prefer to reduce the inventories, rather than buying new stocks in the months to come.

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