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Steel makers to cut production to offset supply-demand mismatch

19th November, 2008

Business Standard

Steel makers to cut production to offset supply-demand mismatch
Business Standard
COPING WITH THE SLOWDOWN
Ajay Modi / New Delhi November 19, 2008, 0:56 IST
After having failed to step up demand despite a 12-14 per cent price cut earlier this month, the domestic steel industry is now taking to production cuts to adjust the demand-supply mismatch and avoid inventory pile-up.
Vinod Mittal, vice-chairman and managing director of Ispat Industries said his company had decided to cut output by 30 per cent since demand had declined 30-40 per cent since October.
JSW, the country’s third largest steel maker has also taken production cuts. “Demand has fallen and inventories have piled up. The company has cut down production in the range of 20-25 per cent. The situation is grim”, said Jayant Acharya, president (sales and marketing), JSW. Acharya expects the situation to improve January onwards as a result of production cuts taking place globally.
Steel Authority of India Ltd (SAIL), the country’s largest steel producer hinted at a production cut while not making it explicit in too many words. “What is the logic to produce when we are unable to sell,” asks SK Roongta, the chairman, while adding that “sales are doing better as compared to October, but is still not up to the mark. As a result, inventory levels are high”.
Companies attribute declining sales to the lack of demand from the automobile, real estate and consumer durables sectors, which are facing rising inventory levels that have choked cash flows. “In October, the offtake of steel has been down to the tune of 25 per cent across the various consumer industries. However,  the situation is expected to be better in November since steel producers have taken up a price cut”, said PK Rastogi, the union steel secretary.
Earlier this month, steel companies cut prices by Rs 5,000-5,500 a tonne. Industry sources said that another round of price cut could not be ruled out. As against a proposal from the steel ministry to impose a 10 per cent duty on import, the government today approved a duty of 5 per cent. Some added that a price cut would be needed to sustain sales even after this duty, since the gap between imported and local steel was as huge as Rs 10,000 a tonne.
“Companies in Ukraine and China are offering steel at a price of $430-440 a tonne (FOB) and a large number of contracts are taking place at these rates. At the current rupee-dollar exchange rate, this translates to Rs 21,300-21,800. The price at a consumption site would come to around Rs 23,300-23,800 after incurring port clearing and inland freight charges. By contrast, the domestic steel is selling for Rs 34,000 a tonne (ex-mill),” said trade sources.

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