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Limited impact of costly steel

Mumbai, Oct. 21: A sharp increase in steel prices in the past year has a limited impact on end users, said Crisil.

“Steel accounts for only a small proportion of total cost for most end users,” the leading rating agency said. “Steel constitutes less than 5 per cent of the total cost of a car, while it forms about 5 per cent of the total cost of roads and about 10 per cent of cost of buildings,” CRISIL said in its research report.

Crisil's statement debunks the theory touted by auto manufacturers that the runaway rise in steel prices may lead to a sharp upward revision in the prices of automobiles.

It takes about 500 to 600 kg of steel on an average to produce a car, the report said. “Given that steel prices have increased by about Rs 5000 per tonne last year, the incremental cost for a carmaker is only about Rs 2500 per unit, which is less than 1 per cent of the car's price,” the report said.

In contrast, excise duties on cars have dropped to 24 per cent from 32 per cent since April 2003, resulting in savings of at least Rs 20,000 per car, which have not been passed on to consumers.

To that extent, car manufacturers' profitability should not be impacted, the rating agency said.

Crisil said steel prices have recovered from historically low prices last year. Hence, any comparison of current prices with last year's levels overstates the impact of the increase.

Current steel prices are only about Rs 3000-4000 a tonne higher than the average prices that have ruled over the past few years.

In recent times, end users have called for a cap on steel prices or for a cut in import duty.

Most domestic steel companies are vulnerable to steel price movements and will be severely impacted by either of these actions. Given their high interest burden, many steel companies, which have reported a turnaround over the last few quarters, will revert to losses if steel prices decline by even Rs 1500-Rs 2000 per tonne from the prevailing levels.

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