For the past six months or so, the Indian steel sector has been buffeted about by one negative development or another.
In the throes of a mining scam leading to a clampdown on iron ore mining and a subsequent shortage of good quality ore, the industry now finds itself battling possible higher import bills due to a falling Indian rupee.
And the weight of the rupee against the dollar has a direct bearing on the cost of steelmaking.
Over the last week, the rupee has been in a free fall. Those responsible in government for controlling the rupee have expressed helplessness in stopping the slide. As of Wednesday, the rupee was at an all-time low of Rs 56.2 against $1 USD. In fact, in the last one year, the rupee value has been eroded by as much as 20 percent as compared to the dollar.
It is sheer bad timing for the Indian steel sector. Not too long ago, the rupee was hovering at about Rs 48 against the dollar and there was not much to worry about on the currency-exchange-rate front. Even the most astute economist, though, had not been able to foresee the sharp drop. Now, the weak gains that were expected to buoy the steel sector this quarter, more likely than not, will be nullified due to the higher import bill, due in turn to the weak rupee, since there seems to be no end to the rupee’s slide.
Right off the bat, two things are under immediate pressure – imports of coking coal and iron ore. India does have stocks of good grade iron ore, but supplies have been disrupted because of the ban on mining. So Indian companies (those without captive mines) have the choice of using the low-grade ore for manufacturing steel or importing the better grade ore.
What was being seen as some kind of silver lining for steel manufacturers was the fact that international iron ore prices had seen a mild correction (about 10 percent) this May due to weak demand from steel companies. Steel analysts said this was because of concerns of a slowdown in China, the world’s largest consumer, and the eurozone crisis. Some Indian companies had started resorting to importing iron ore, despite a good reserve of the same, because of the disruption in supplies in the wake of the mining scam.
According to a report in The Economic Times, prices of Indian 63% Fe and 62% Fe were down overall by 2 percent and 7 percent to $148 and $135 per tons, respectively, over the last two weeks. There are expectations of iron ore prices dropping by another US $5 per ton in the near future.
Continued in Part Two.