The development has come as a big jolt to the already fragile real estate industry of India. Reeling in the abyss of an unprecedented slow down for the past 5-6 years, the real estate industry was showing some signs of resurrection post COVID, but a sharp rise in steel prices has put paid to any hope of quick revival in near future. With steel prices touching Rs. 45,000 per tonne, real estate developers in Mumbai and all over India find themselves in rough waters once again since it is not possible for them, at this juncture, to pass on the burden to the customers. Increasing the prices of residential projects in Mumbai and all over India would only mean further slow down in an industry that’s battling an extraordinary fall in demand for the past many years.
The current rise in prices has increased the per tonne price of construction steel and TMT bars by almost 30 to 40% compared to pre-COVID times. Developers in Mumbai and another tier 1, as well as tier 2 cities of India, are worried about the decrease in their profit margins due to the abnormal and phenomenal increase in steel prices. Since they are in no position to adjust or accommodate the price rise in the cost of the project the real estate developers are expecting their profit margins to reduce by 4 to 6%. They term this reduction to be pretty high for the sector and therefore unsettling the equation.
The rise in steel prices will have a domino effect, and if you believe the industry experts, the first half of the current year 2021, could see an increase in the prices of residential properties in Mumbai. The real estate builders in Mumbai and rest of India are of the opinion that the sudden rise in steel prices, and that too this steep, would bring the already stressed commercial and industrial segment under unwarranted additional pressure, resulting in the postponement of new projects that were planned to be launched in near future. The demand for residential projects in Mumbai and in the country is seeing green shoots, but the rise in steel prices has brought the progress of under construction and the launch of new projects under the cloud.
In the process of construction, steel makes for 25% of the material cost. It is the most used material in the building process. Therefore, a slight change in the price of steel can make a huge difference in the total cost of production and in turn can affect the net price. Now, steel manufacturing companies hiking the price of steel by Rs. 2,700 per tonne, citing an increase in demand, will surely have a cascading effect on the construction of ongoing projects as well as upcoming residential projects in Mumbai and elsewhere. With the end consumer having to bear the brunt, developers in Mumbai and in all over the country fear a drop in the demand once again.
Instead of rolling back the price hike, experts believe that the steel manufacturing companies will raise the prices still further due to the rise in iron ore prices. The interesting point here is that even after the recent rise, the prices are still at a 5% discount to the landed cost of imports, which means there is still a lot of headroom for steel manufacturing companies to increase the prices further by attributing the hike to increase in demand from auto and white goods segments. If the steel manufacturing companies do go in for a further price rise, the Indian real estate, and especially the real estate in Mumbai, will have to deal with tough times, government packages and incentives notwithstanding.
It is imperative here to understand why there has been this kind of steep price rise? There are more external forces than internal ones to be blamed for this price hike. The price of iron ore, a major raw material used to manufacture steel, has surged globally. The reason being, a sharp rise in demand for steel from the world over including China which is one of the highest consumers of steel. Thanks to them scripting a remarkable economic turnaround after the lockdown, the demand for steel has increased manifolds, and Indian manufacturers are making the most of the rise in demand. There is a substantial rise in demand in India too, but because the mining of iron ore has not increased to match up to the rising demand, it has given rise to shortage and therefore inflation.
It is also said that another reason for the price hike is because of the emphasis on Make in India by the government of India. Recently, there was an increase in the import duty on steel to discourage importers from importing steel and go for domestic purchase. The domestic steel manufacturers have used this an opportunity to make extra profits by increasing the prices of steel.
SO, is there any way to check the rising steel prices? Well, various industrial bodies, including Confederation of Real Estate Developers’ Association of India (CREDAI, have requested the central government to help stabilise the spiralling steel prices by stepping in and putting a curb on the export of iron ore so that domestic demand can be fulfilled. They are also requesting the government to allow the increased import of steel. Only time will tell whether these measures are good enough to reduce the steel price rise or if not reduce, at least stop the prices from rising further.
If the rise in steel prices is not arrested quickly, experts are of the opinion that investment in the real estate sector will be badly hit. Developers in Mumbai fear that it will have a major impact on the construction cost of residential flats in Mumbai. It will also have a major effect on the affordable housing sector as well as the prices of luxury properties in Mumbai and rest of India. It will once again stall demand and would inflict further blows to the already bleeding real estate in Mumbai and India as a whole.
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