With prices of construction steel having swung up sharply since last year, engineering, procurement and construction (EPC) companies are bearing the brunt of severe cost escalations.
Consequently, irate EPC players, have been negotiating with domestic steel mills for fixed-price annual contracts as a buffer against rising prices. In fact, in Nov’2020, the National Highways Builders Federation (NHBF) wrote a letter to the Minister of Road Transport and Highways (MoRTH), complaining that “steel companies have reduced/(are) holding production of long products which has created non-availability of TMT as per demand and resulted in steep hike in prices. Further, their focus is on flat products and in export of billets.”
The letter concluded by asking the ministry to “approach the Ministry of Steel for necessary, corrective action so that such attempt of cartelisation of steel prices gets curbed”.
Sources in NHBF told SteelMint that representations were made by the body to MoRTH and which have been considered “sympathetically”, with the minister having written to the Secretary, Ministry of Steel.
NHBF companies are concerned at the growing exports of especially long products which are required in the highway sector, leading to scarcity in the domestic market, the source observed.
Contract norms need amendments
Further, EPC players have requested MoRTH to consider inclusion of cost escalation clauses for projects awarded before FY’21. An existing clause in contracts for government infra projects allows the cost escalation to be absorbed up to a certain limit. However, a source at a pan-India EPC company said cost-overrun is common but the issue now is that the complex macro-economic indicators based on which the cost escalation is factored in are not giving a true indication of the actual steel price increases.
“We have often highlighted to NHAI that if this cost escalation goes beyond a level, which it has, then it should compensate the EPC players accordingly,” said the NHBF source.
Thus, rising steel, cement prices are necessitating amending of contract norms. One of the options before the ministry is to keep that clause more flexible.
“The contracts will differ across regions, depending on the prices of steel, cement etc. But, the contracts can be made flexible to accommodate any undue hike in steel and other input prices,” the source added.
Price increases
The two main items required in highways, bridges and flyover construction are rebar and hot rolled (HR) plates.
BF-grade, FE-550D rebar prices have risen almost steadily in the last one year. From INR 35,300/t in Jul’20, these have risen to a record INR 54,550/t in May’21. The IF-grade Fe 550 too traversed from INR 31,000/t levels in Jul’20 to an all-time high of INR 49,550/t in May’21. After seeing some corrections due to sluggish domestic demand, both categories in mid-Jul were resting at around INR 49,000/t and 46,000/t respectively.
Trade level HR plate prices increased from a low of INR 42,500/t in mid-Jan’20 to a peak of INR 68,000/t in June and were hovering around INR 65,000/t in mid-Jul’21.
Project delays
Around at least 25% of EPC projects are seeing delays. Those with three-year deadlines will easily cross four years. In certain cases, delayed projects are not allowed to avail of the cost escalation benefit, sources informed.
“Projects are getting delayed because cash flow is an issue with EPC companies not receiving their payments on time. So, we have trouble making payments to our suppliers in cement, diesel, labour etc,” the source said.
Outlook
At present, EPC players have monthly deals with steel mills, as per a source. However, it is unlikely that mills would readily agree to annual contracts since these would work to their disadvantage. “Mills would not prefer locking prices long term, if there is scope to raise the same. For NHAI projects we have done, no steel mill wanted to go for longer term contracts. These are usually based on monthly purchases,” the source added.
Prices as on 8:45 IST, 27 Jul. d-o-d changes indicated against closing price of 26 July
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