The sharp fall in rupee is likely to prompt domestic steel companies to raise product prices in near future in a bid to offset cost rise in key raw material like coking coal, but total pass through may not be possible due to subdued demand environment, according to analysts.
"Steel companies are likely to increase prices, especially of flat products in which there is import-parity, in order to offset the rise in cost of raw material like coking coal due to rupee depreciation. However, whether this price rise will be sustainable or not will depend on the demand environment in the coming months," India Ratings Director Ashish Upadhyay said on Monday.
He said the price rise announced in the first quarter by many steel companies has to be rolled back due to weak demand environment, but the firms may test the water again through a rate hike this time.
As per experts, prices of coking coal, which is imported by the steel firms, have shot up by around Rs 1,000 per tonne due to the rupee depreciation.
"Total pass-through of rise in cost due to rupee depreciation may not be possible due to weak demand environment," said Bhavesh Chavan, senior analyst (Metals and Mining) at Angel Broking.
Domestic steel demand increased at one of the slowest pace of 0.2 per cent to 17.8 million tonnes in the first quarter of the current fiscal on the back of slowdown in automobile sales. Last fiscal too, steel demand had grown at a subdued pace of 3.3 per cent against the targeted eight per cent.
On the possible margin pressure on steel companies, Upadhyay said the domestic firms would face such a situation due to the persistent high cost of steel output and producers' limited ability to pass on higher costs due to subdued demand from the end-user industries.
Depreciation of rupee against major currencies had offset any advantage that could have accrued on account of lower coking coal prices in global market compared to last year, the Upadhyay said.
The Indian currency today tumbled 110 paise to once again close below the 64 mark against the dollar. It has been trading above 60-mark per dollar for the last several weeks.
Experts added that exports might not be able to compensate the weak demand scenario prevailing in the domestic market.
"Companies like Essar Steel and JSW Steel have already started focusing on it (exports). But, exports can only partially offset a weak demand environment prevailing in the country," an analyst with a Mumbai-based brokerage firm said.
Referring to this issue, an analyst from rating agency ICRA said extent of rise in product prices would depend on the demand scenario.
"We have seen in recent months that despite the landed cost of coking coal firming up because of the currency movements, domestic steel prices have not increased as steel companies don't have the adequate pricing power due to subdued demand environment," said Jayanta Roy, Senior Vice-President and Head of Corporate Ratings at ICRA.
If export growth is sustained — overseas shipment has shown around 15 per cent growth in the first quarter — in the coming quarters too, it can compensate a weak demand in the domestic market, he added.