In the last 12 months, steel prices have undergone massive fluctuations. From April 2021 – April 2022, the price of steel rose from Rs. 55,000 to Rs. 76,000 per MT. However, weak seasonality, market corrections owing to a drop in construction demand during the monsoons, along with the government taking corrective measures means the price of steel could fluctuate to significantly by March 2023, industry analysts anticipate. This price fluctuation can be traced to the following recent developments:
Production curbs. In 2021, China, a major producer and exporter of steel accounting for nearly 60% of the world’s steel supply, witnessed a shrinkage in local steel markets due to production curbs. This resulted in an unprecedented 5–7% rise in steel price week-on-week by the middle of 2021.
A rise in raw material costs. By April 2021, the iron ore price had hit an all-time high, caused by an explosion in steel demand from China, India, Europe, the Americas, and emerging markets in Asia recovering from the slowdown induced by the COVID19 pandemic.
Worldwide commodity price stagflation. Cartelisation by local resource suppliers in key markets, a breakdown of regional trade agreements, and stagflationary pressures in several developing economies around the world have hurt the resource sector globally. Sectors that are vulnerable to price erosion and margin pressure such as steel and cement are taking the brunt of this damage.
Sluggish production due to COVID19. The sudden spike in demand post COVID19 has resulted in underutilised, under-capacity steel producers having to ramp up production, causing a lag as the required capital infrastructure needs to be put in place.
Global conflicts causing disruptions. The war in Ukraine has had a direct impact on interlinked supply chains. In an interview with Business Standard, Seshagiri Rao, joint MD and group CFO at JSW Steel, indicated that raw material costs had surged for Indian steel companies after the Russian invasion of Ukraine in February this year, although demand-supply dynamics are likely to play out and settle prices within a quarter.
This erratic fluctuation in steel prices in India puts the real estate and construction industry, as well as MSME suppliers for the construction industry, in a tight spot.
The construction and real estate sectors account for nearly 60 per cent of total steel consumption in India. With no clear way to anticipate future steel price rises, and uncertainty on the horizon owing to global price fluctuations, many MSMEs in this sector have no choice but to absorb losses, or halt operations. One report from the Indian Pipe Manufacturers’ Association indicates volatile steel prices in the past 12 months have driven many manufacturing plants to close down operations.
How can MSMEs escape this vicious cycle?
Make the move to e-commerce marketplaces. An important trend that is reshaping the steel industry is the wholesale shift to online e-commerce for steel purchases. MSMEs have realised a direct reduction in costs by moving away from offline procurement. Online platforms minimise major supply chain and logistics costs for MSME businesses while eliminating supply shortages since the required steel intermediate products are stocked in advance by the seller’s platform.
On e-commerce platforms like JSW One MSME, customers also have the freedom to choose from a wide variety of products on offer, helping businesses find the steel that best suits their needs without investing time in evaluating dozens of different vendors. Additionally, credible online platforms only sell certified graded steel from reputed steel producers, putting an end to any quality concerns.
Online steel purchase also allows flexibility in order volumes, and allows for a variety of payment methods, doing away with administrative time wasted on low-value procurement tasks.
Timely course corrections to leverage governmental measures more effectively. The government has been quick to react to arrest or at least stabilise some of the price fluctuations in the steel market. A slew of recent measures announced in March – April 2022 are expected to bring the prices down by a tolerable but significant 10 – 15% by Q3 2022.
The measures include a partial ban on steel exports to invigorate local supply, an export duty levied on exports of finished steel products, combined with a customs duty waiver on the import of raw materials such as coking coal and ferronickel to boost primary steel producers. Duty on exports of iron ore has been hiked by as much as 50%, while the export duty on steel intermediaries has been hiked by 15%.
The recent reduction in fuel prices is further expected to ease steel intermediate input costs by lowering logistics and supply costs for MSMEs.
While these macroeconomic steps are likely to give a major fillip to the domestic steel industry, MSMEs need to strike while the iron is hot and leverage the conducive business environment before a market downturn or any future policy revisions. Prices of TMT have hit a low of Rs 52,000 per MT in May. With attractive discounts available on online platforms like JSW One on the purchase of TMT bars, hot- and cold-rolled coils, you have the opportunity to stock up inventory before inflationary pressures cause steel price fluctuations again.
Intelligent pricing. The steel market situation presents a good opportunity for MSMEs to revisit their pricing strategies. MSMEs typically price on a reactive basis, increasing the risk of financial losses due to market fluctuations. Expert forecasts are prone to parallax errors and biases.
Many MSMEs are opting to move to technology-enabled dynamic pricing, instead. In dynamic pricing, the cost of a product is set in real-time, with a flexible approach that helps a company that sells goods over the internet to adjust prices in response to market demand. E-commerce platforms allow for dynamic pricing, and can also help MSMEs improve their margins by introducing products with the highest fair price (inspired by the Dutch flower auction method). A combination of the flower auction technique with FCFS (first come, first served) can further enhance the pricing model. This can help MSMEs maximize returns under prevailing market conditions, while at the same time eliminating overspending on excess inventory on the supply side. The net effect is a significant positive impact on inventory to cash and improved overall margins.
With the advantages of dynamic pricing self-evident, several MSMEs in the real estate and construction sector have already made the move to e-commerce platforms for all their steel needs.
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