India: Infra, realty laid low by rising steel prices

• Infra construction cos lowering steel procurement by 30-40%
  
  
• Infra projects facing cost overrun but cannot be stalled
  
  
• Some cos doing need-based procurement, others deferring purchases
  
  
• Realty players threaten to stall construction
  
  
• High export offers keep domestic prices high
  
  
• Downstream sector does not see prices dropping even if Russia-Ukraine war ends
  
  

Morning Brief: Escalating steel prices are taking a toll on end-users. Building and infrastructure construction, which has the largest share in the steel usage pie at 60-65%, has been badly impacted with prices shooting up phenomenally.

Infrastructure construction companies, impacted negatively, are lowering their procurement by 30-40% as projects see cost overrun by the same percentage, SteelMint learnt from sources. Material is more easily available but demand is not that high. Long-term contracts will not be possible because suppliers would not agree since steel is such a volatile market. Most of the procurement is traditionally done on a monthly basis.

An infrastructure construction source voices concern mills are getting very high margins in export orders, a factor that is also pushing up domestic prices. He adds that material is available on spot basis where offers are valid for a few hours.

How high are steel prices?

Trade-level blast furnace-route rebar prices, ex-Mumbai, Delhi and Chennai are up 27-30% in March since January and 14% m-o-m since February, as per SteelMint data. On a y-o-y basis, rebar prices are up almost 75%.

Hot rolled coil (HRC) prices, on the other hand, are a few notches shy of doubling. Ex-Mumbai, trade-level prices are up 90% y-o-y in March, 2022. Since January, prices are up 14% in March and 10% m-o-m.

How are infra construction players handling the cost push?

Projects cannot be stalled: Infrastructure projects, unlike in real estate development, cannot be stalled. Sources inform that even though steel prices are rising, infra construction fixed costs at project level are very high. "Penalties, as per the contractual liquidated damages (LD) clauses, are substantial. Projects have deadlines. Hence, it is not possible to move to the sidelines unlike in real estate development which is still unorganized to a certain extent," says a source.

"Also, almost no player in infrastructure construction has the kind of funding where it will have the luxury to stop production. Plus, we have to pay our labour force, and are thus compelled to sustain procurement," adds another source.

An official with a private infra company says, "We have been hit. At the same time, we have commitment to our clients and cannot stall projects. We have deliverables which we will have to honour."

Rebalancing of procurement: It seems, by the time officials are finalizing orders and going for approvals, prices have changed. "The pinch is harder in flat products although longs prices are hitting hard too," says a source at a large company handling big-ticket projects. The company is buying at a minimum level since it has no control over the cost. The source explains, "Only in areas, where we can defer buying, we are doing so. As in structural fabrication items etc."

A large private infra company indicates it has adopted a four-pronged strategy. One, to absorb the cost escalation it is only procuring the inventory as per needs. Secondly, in end-February, an escalation in geo-political tensions was expected. So, 70-75% of its March procurements were done in end-February. "Thus, the prices we got were INR 10,000-12,000/t lower from the present levels," a source in the company reveals. Thirdly, the company is doing internal transfer of materials where possible instead of procuring fresh from the market. Fourth, where possible - ie, if included in the contract terms - it is asking its clients to absorb some of the cost escalation. "So, we will take a hit in some projects, while pass on the cost increase to some clients," the official adds.

Real estate

The Confederation of Real Estate Developers' Association of India (Credai) - an apex body of private real estate in India with over 13,000 member developers, is concerned at the sustained increase in prices of construction raw materials, including steel and cement. It seems property prices may go up by 10-15% in the near future on the back of rising input costs for builders.

Historically, prices of almost all materials and commodities shoot up whenever there is a consistent increase in fuel prices but prices of construction raw materials have been increasing consistently since January 2020. In fact, construction costs have escalated by 10-15% in the last 18 months, says Credai.

However, the Russia Ukraine war, which has made fuel costlier, has aggravated the price increase.

In fact, as per reports, builders in the Delhi NCR region are planning to halt purchase of raw materials as well as construction work.

Similarly, over 3,000 builders under Credai in the Maharashtra region have also threatened to stop work at construction sites, owing to the steep rise in input materials, especially steel.

Outlook

Infra projects will not get stalled despite cost escalation and companies will have to rebalance their procurement.

So, will infra construction players pass on the cost escalation to project owners?

"We get escalations based on formulas defined in the contract which, in turn, are based macro economic indicators. We generally do not get compensated fully," reveals an official with a leading infra developer.

"Even if the Russia-Ukraine crisis is resolved, steel prices would not exactly start declining instantly. High export offers will keep domestic prices on the higher side," complains the official.

Real estate developers, on the other hand, may pass on the cost escalation to consumers or delay the possession schedules.