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High steel prices have started hitting Railway projects in India to such an extent that projects are getting delayed, with contractors slowing procurement. While the freight corridor project has price variation clause to compensate for such eventualities, it is not enough. Dedicated Freight Corridor Corporation of India Limited Managing Director Mr Ravindra Kumar Jain told BusinessLine “The sharp increase in steel prices in last six months has become a big challenge. For us, steel is a key component for tracks and bridges. We are seeing an increase in demand for claims under price variation clauses, particularly from contractors of engineering procurement contracts, which were awarded much earlier. Large contractors can still manage, but it is a big challenge for others. Earlier, contractors would buy steel and stock it for use. Also, steel is not being sold on credit now. So, now, contractors are avoiding ordering till the last moment when they would actually need to use the steel. Our contracts usually have a range of price variation clause that does not take care of sharp spikes.”
Also getting affected are the electrification project vendors because of soaring steel and copper prices. Mr Rajeev Jyoti of Rail Business said “A typical Railway Electrification contract comprises overhead catenary equipment, traction substations, signalling and telecom, electric works and associated civil buildings. In a typical project cost break-up, copper and steel contribute to 25-30% and 15-20% respectively. The prices of these metals have gone up by more than the extent to which the company will be compensated as per its price variation clause. In the last one year, London Metal Exchange copper escalated by around 90 per cent and cost of steel increased by 26%. The price variation formula in the contract document is based on Reserve Bank of India indices. RBI indices are not well correlated with LME for copper and Indian Electrical and Electronic Manufacturers Association for steel. All these uncontrollable variables significantly increase the electrification cost.”