A weak rupee could mean higher raw material import bill for steel companies. However, it will also help arrest falling steel prices.
Steel majors are unanimous that the cost of production is set to increase by at least Rs 1,000 a tonne if the rupee stabilises at 58. Much of the increase will come from coke, which is largely imported. At 55 to the dollar, the cost of coke per tonne works out to around Rs 8,800; at 58, it would be Rs 9,280. Coke accounts for around 50 per cent of the input cost for steel makers.
Also, the cost of funds will increase. Amidst the gloom, however, there is a silver lining for exporters.
"The rupee depreciation is hurting the steel industry since critical inputs such as gas and coal will become expensive. However, the increase in costs will get offset and is beneficial for those who export steel," said an industry representative.
Over the past month, international prices have dropped by about $30 a tonne. Domestic prices are guided by global ones, although there is a significant differential -- in some cases, as much as Rs 4,000 a tonne -- between landed imports and domestic prices. The ruling price of hot-rolled coil (HRC), a benchmark for flat steel products, is Rs 34,500 a tonne. Indian products are still costlier than imported ones, but the difference with landed cost has narrowed and that reduces competition pressure from imported steel.
"From a pricing perspective, it might help," said Jayant Acharya, director (commercial and marketing) at JSW Steel. Acharya, however, pointed out that on an overall basis, a depreciating rupee was not good for JSW Steel, even though it might shield prices. Rising imports have been a major cause for concern for steel companies, especially in the backdrop of a muted market. Between January 2012 and March 2013, imports of basic HRC grade were at 970,550 tonnes.
"Demand in India is much higher than supply," said Ankit Miglani, deputy managing director, Uttam Galva Steels.
In India, at least eight million tonnes of capacity is expected to go onstream this year. China, which was facing an overcapacity last year at 1.95 million tonnes of output a day, has raised it further to 2.15 million tonnes a day. The industry is not expecting a respite in the near term, as infrastructure projects are on hold. "Not just government projects, private projects are also on hold and the scenario is unlikely to change before the next elections," a major producer said.