Steel prices are likely to see an increase of nearly Rs 500-1,000 per tonne next month on account of a 6.5% increase in railway freight rate.
"The 6.5% rise in railway freight rate means around Rs 65-80 per tonne increase in iron ore transportation cost, which would mean Rs 160 per tonne rise in steel production cost. The freight hike will have to be passed on otherwise it will impact our bottomline," said a senior official handling raw materials at a leading steel maker.
Commenting on rail freight increase, Dilip Oommen, CEO & MD, Essar Steel, said, "While increasing railway freight is necessary in the long-term interest of Railways, it will have impact on the transportation cost of raw materials and finished steel products. There is bound to be a cost push for the customers." He, however, declined to describe the extent of increase in steel price.
On Friday, the railway minister Sadananda Gowda announced a 6.5% hike in rail freight rate along with a 14.2% hike in long distance passenger fares.
Steel industry is already reeling under higher iron ore prices following shortage of the key raw material in the country. Iron ore continue to remain in short supply following mining bans in Odisha and Goa. Supply of ore from Karnataka has also not improved significantly after mining was allowed by the apex court in April as the environmental clearance are slow.
"Long steel manufacturers would be able to pass on the freight hike, however flat steel producers may not be able to do so as prices of these products are internationally linked," Giriraj Daga, senior analyst with Nirmal Bang Securities, said.
C P Baid, deputy managing director of Monnet Ispat, said that passing the hike to consumer is not a prerogative as flat steel prices get decided on the basis on international prices.
"Even if price hike is considered, imports of these products would increase as prices are not as high in international market. It is, however, definitely negative for already struggling steel industry," he said.
Steel demand is generally at its peak till May after which it subsides due to onset of monsoon. Thus, many industry participant argued that there may not be much room for hiking the price.
"No one in domestic market is in mood to consider price hike. The production cost of steel is likely to go up by Rs 500/tonne following the freight hike. Our margins will be impacted as we would not be able to pass on the freight hike. Plus, railway freight hikes are often followed by increase in road transportation cost, so total transport cost will go up," R K Goyal managing director Kalyani Steels, said.
If steel companies are not able to pass on the freight hike then there could be a negative impact on their operating profits. In case of Tata Steel it would be 2-3%, for JSW Steel 5-6% and for Steel Authority of India, it would be 8-10%, Daga said.
In the case of long products, leading steelmakers have taken a three consecutive hike adding up to Rs 1,500 per tonne in past 45 days, a leading distributor of long steel product in Mumbai said.
"Railway freight hike is generally passed on, and hence a hike Rs 500 per tonne could be expected in July," he added.
Prakash Duvvuri, head of research at OreTeam, said added cost of moving iron ore may not be much. "Assumption being that the current iron ore prices have swelled up, and we are waiting for a correction.
Basically, the correction would offset the freight hike. Moreover, the busy season surcharge is going to end on June 30. Hence, it is very much possible the current hike wouldn't bite much for all those buying iron ore by rail.
In fact, if the iron ore situation comes back to normal then there still could be room for a minor correction. Also, not to forget the monsoons have started, so room for further hike in costs related to iron ore would not be entertained."