The Telegraph
Saturday , June 21 , 2014
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Freight fright for steel, cement

Mumbai, June 20: Prices of steel and cement are likely to go up following the hike in railway freight charges by 6.5 per cent, raising the possibility of a knock-on effect on inflation.

Steel and cement are key to manufacturing; any increase in freight will increase the cost of these raw materials, which consequently will be passed on to consumers by the industry.

Steel prices may rise by up to Rs 600 a tonne as companies will have to shell out more on the transportation of key raw material iron ore as well as finished products.

“The margins of steel makers are likely to be impacted by the increase in freight rate and steel prices may be hiked by Rs 300 to Rs 600 a tonne,” an industry analyst said.

However, companies such as SAIL, JSPL and JSW Steel said they were yet to estimate the impact of the hike.

For cement companies, the problem is compounded by the monsoon season. They may not be able to fully pass on the higher freight charges because of weak demand during the ongoing monsoon.

Analysts and industry circles said the freight hike should make cement dearer by Rs 5-10 per bag.

“Because of the monsoon season, the manufacturers may have to absorb a part of this cost increase as demand is generally weak and this may affect their margins,” sources said.

Rajesh Kumar Ravi, an analyst at Karvy Stock Broking, told The Telegraph that the rise in freight charges would have a negative impact in the short term as companies might pass it to customers with a lag.

Freight costs account for around 15 per cent of the total costs of the industry.

He, however, pointed out that while cement prices in many markets were not encouraging, the industry was looking forward to a better performance during the second half of this fiscal.

“The optimism is that demand will start improving because of various measures by the new government, thereby leading to better margins and profit growth,” he added.

According to a CII-AT Kearney report, supply bottlenecks have increased production costs for many cement players. The production cost for the top nine players, who account for almost 60 per cent of the industry capacity, rose at a compounded annual growth rate of around 8 per cent between 2007-08 and 2012-13. One of the reasons behind this was the steep freight and distribution charges following the rise in the price of diesel, the report said.

Economists, however, welcomed the decision.

“This (far increase) was long overdue. While it shows how the current government can take tough decisions, more importantly, the move will be good for our railways as the government can bring it to a more efficient platform,” Rupa Rege Nitsure, chief economist at Bank of Baroda, said.

Soumya Kanti Ghosh, chief economic adviser at the economic research department of the State Bank of India, said the move could impact inflation in the short term but will help to improve the railways’ finances by reducing the cross subsidisation of passenger fares from freight.

“The increase in fares will augment the railways’ coffers and may be just the right medicine for investment in infrastructure,” Ghosh added.

According to SBI Research, following the hike, passenger receipts may increase 33.5 per cent over the previous year, while freight receipts may jump 16.7 per cent compared with 12.5 per cent estimated in the interim budget.

Meanwhile, the Fertiliser Association of India has said the fertiliser subsidy bill will rise by about Rs 200 crore annually.

In the interim budget, the government had fixed the fertiliser subsidy at Rs 67,970 crore for the financial year ending March 2015 compared with the revised estimate of about Rs 67,971 crore in 2013-14 fiscal.

Every year about 44 million tonnes of fertilisers, including urea and phosphates and potash fertilisers, are moved through the country. Of this, 80 per cent are moved through rail and the rest via road.