An important factor that governs real estate prices is that of steel and cement. The recent months have seen a great deal of activity happening in both these sectors. DH Realty takes a closer look.

Steel on the rise
Steel prices have seen a continual rise this year, adding to inflationary pressure because of its use across industries. The latest increase of up to 10 percent is the sharpest and the most unexpected. With the Budget cutting excise duty to 14 percent and exempting steel scrap from import duty, it was widely expected that companies would hold back any increase. Says Viresh Oberoi, Managing Director, Mjunction Services Limited, that limited a 50:50 joint venture of SAIL and TATA Steel, “Steel prices are on rise primarily for three reasons. Input costs have increased, particularly prices of iron ore and coking coal that have increased substantially. For example, in the last year, Coking coal prices have jumped 300 percent. Demand of steel has increased because of developmental work in China, India and the Middle East. However, steel production has not been able to keep pace with demand. Consolidation among steel players has led to inefficient capacity being shut down.” 

Demand of steel products has also increased multifold due to increase in overall construction activities, resultantly, prices of steel increased. “The real estate sector is affected by the steel prices as every square foot construction require 5 kilograms of steel on average basis. Steel was priced at Rs 38 per kg in the month of January 2008, which was increased in March to Rs 47 per kg. Thereby, the per square foot cost of construction increased by Rs 45 because of steel prices. Again in the last week of April, the prices were reduced to Rs 41 per kg, resulting in overall impact of Rs 15 to Rs 20 per square foot-reduction in construction cost, “ says Satish Kumar Agarwal, CMD, Kamdhenu Ispat Limited. Adds Gopi Ramanatha, Director, Xindia Steels Limited, "While the steel industry will absorb some of the cost increases, it is and will be forced to pass on these increases to its customers, which in turn, will make construction expensive. This may affect the growth in the real estate sector as buyers will shy away from these high prices." 

“Unfortunately, rather than fast-tracking the various greenfield projects which can lead to increase in production, the Government is planning to impose export duty.

This is a knee-jerk reaction and not at all sustainable. This is being done as elections are only nine months away, therefore short-term fiscal measures are being resorted to, rather than medium-term production increasing initiatives,” adds Oberoi. Demand across the world will be strong and it will provide a great opportunity for Indian steel producers to supply steel domestically as well as to export steel at favourable prices to the international market. India must produce 200 MT by 2020. “Globally, I do not see any change as far as steel prices are concerned. Steel rebar (a prime material used in the construction sector), would continue to be sold at US $1000 a tonne,” adds Oberoi. A long-term solution, according to Ramanatha, is to provide a fast-track window to all new steel projects to set up good technologies in Low Grade Iron Ore processing within the country and hence, reduce exports of low grade iron ore and also the effective use of the said coal within the country. Encouraging mining companies to bring in new technologies available around the world for mechanised, environment friendly mining will help.

Cement not enough
Cement prices in India have been rising in recent months with domestic cement plants unable to produce as much as the market needs. Production in April-November 2007 totalled 107 mt, up 8.35 per cent over the same period a year ago. With a manufacturing capacity of 38 million tonnes (mt) a year and domestic consumption of 26 mt, Pakistan has a surplus of about 2 mt for export. The domestic cement industry has a capacity of 168.31 million tonnes a year and plants are spread over 19 states. The Centre recently decided to ban cement exports from the country in an apparent attempt to improve supplies in the domestic market and stem cement price rise during the coming months. To ease supply constraints and facilitate imports, the government, in January 2007, scrapped duties on cement imports and followed it up by abolishing the 16 per cent countervailing duty. 

Says a spokesperson of Ambuja Cements, “Raw material cost has increased by an average 8-12%. Fly-ash, a waste product generated by power plants, was slated to be disposed off, free of cost as per Ministry of Environment and Forests (MOEF) notification. However, in total disregard to this notification, power plants have started charging money for the same, under one pretext or the other.

Cost of imported coal has increased over 100 percent from 65$ in the previous year to 135$ this year. The average domestic coal prices, available against linkages and e-auction, have also increased by more than 22 percent, all of which have spiked the cost of production. Power cost (average of captive cost of production and grid power), has gone up by about 9-10 percent. The cost of transporting finished cement from the factory to the market has gone up by around 6-7 percent.  It is a highly taxed commodity and in the Union Budget 2007/08, Government amended the Excise duty structure from specific to 12 percent ad-valorem on MRP that further increased Excise burden by around 35 percent. It is appropriate to add here that despite the fact that ad-valorem Excise is imposed on MRP, no abatement was allowed.”

Clinker not clicking
Apart from this, Excise on Clinker has been increased from Rs 350 per metric tonne to Rs 450 per metric tonne in the Union Budget 2008-09. Incidence of taxes has also been increased by state governments, eg, AGT increase in HP and Additional Tax increase in Gujarat. The bulk of the cost increases were absorbed by the industry leading to decline in margins. The industry plans to add 100 million mt capacities in the next 3-4 years that requires around Rs 50,000 crore investment. This would call for ploughing back funds from earnings apart from raising equity/debt.

The prices may remain under pressure due to incremental supplies in the market from new capacities. “Cement prices would soften if the Government allows abatement on MRP as applicable to all other products, rate of VAT is brought down to 4 percent (as in steel) from present 12.5 percent. Pakistan cement is being imported into the country without import duty or CVD (Countervailing Duty). This cement is being sold at Rs 200-210 a bag, while domestic cement in the same region is being sold at Rs 235 – 240 a bag. If excise duty, which is the same as the countervailing duty on imported cement, is removed on domestic cement, the cost of cement will be reduced.
Reduce import duty on coal/pet coke to zero and increase availability of linkage coal. Prices have been kept stable even in the environment of increased taxes and levies,” says the spokesperson from Ambuja cement.
The construction sector is growing at an annual rate ranging 15 to 18 percent. Similarly, production capacities of steel have to be increased otherwise prices will go up. “In the short term, demand-supply will affect the steel prices but in long term, prices would be stable at the current level, provided coke and iron ore prices in the international and national market remain the same and government and industry measures continue,” says Agarwal. Rajnikant S Ajmera, MD, Ajmera Realty & Infra India Ltd and president, CREDAI (Confederation of Real Estate Developers Association of India) and chairman, CORSMA (Cold Rolled Steel Manufacturers Association of India), adds, “Steel and cement prices are increasing primarily because of arbitrary actions by the steel and cement manufacturers. Cartelization by these manufacturers cannot be ruled out as the same is under investigation by the MRTP Commission of India. The Government’s recent measures to control the steel and cement prices are laudable — but it  (government) needs to act seriously taking all the stakeholders into confidence and make affordable housing a reality and not a distant dream.”