Soaring steel prices

Like so much else in this country these days, the economy has also started to generate unwelcome news. The latest unpleasant news comes from the steel industry.
According to a Recorder Report, prices of steel products hit the highest mark last week as the price tags on seven different products such as billets, pig iron, slabs, hot and cold rolled coils, thick plates, and galvanised steel registered increases ranging from Rs 500 to Rs 2,500 per ton.
This is reported to be the second such increase in the current month alone. Needless to say, these price hikes are going to have an adverse impact on activity in such crucial sectors as construction and manufacturing - the latter having only just begun to pick up momentum, outpacing even the agriculture sector in terms of its contribution to the GDP.
The affected industries are also likely to pass on the added burden to the consumers, further fuelling the current inflationary trend. The steel dealers have been defending the price rise, citing international increases as a justification, which is valid, though only partially.
Indeed, prices of steel products have gone up globally for a variety of reasons. First and foremost of these is a dramatic rise in international demand, with China showing an insatiable appetite for it since its industrial, housing and infrastructure needs are growing at a rapid rate.
The cost of other raw material and freight too has increased manifold over the past few years. However, in our case, there is more to the story than the international factor. Local supply side problems are responsible for making a bad situation worse.
Reports suggest a linkage between the current power crisis and a production slowdown in the steel sector that created a wide gap between supply and demand. The melting units and rerolling mills, for example, have been running 40 percent short of their production capacity ever since the power crisis hit the system. Clearly, things would not have been as bad as they have become, despite the international prices, had we been managing our energy affairs well.
So far as the international prices are concerned, experts say they are not going to retreat in the foreseeable future. In the past, it was usual for them to rise and then retreat within a certain time span.
That is unlikely to happen this time, given that the demand in China as well as India is believed to remain strong. Demand pressures are also to come from various other sources. It will take a while for the investors to discover that, unlike in the past when the demand remained within certain limits, it is going to rise. Which may convince them to make substantial investments in developing the sector. That, of course, will take time.
We should prepare to deal with the soaring steel prices within our context. Our economic policy makers must put their heads together to figure out the best way forward, to ensure that nothing jeopardises the gains our production sector has made in the recent years, or the plans that are underway for various infrastructure projects. Hopefully, they will grasp the situation in time and take appropriate action.