Economic Times, India - Contrary to some reports, raw materials for steel aren’t actually costing less these days. For instance, thanks to a 40% export tax by China, the price of metallurgical coke, a key input for hot rolled coil (HRC), is currently ruling at $430/tonne, which is roughly the price at which HRC itself is being sold in the global market. Mind that about 0.6 tonne met coke goes into 1 tonne of HRC.
While the spot price of iron ore exported by Indian miners to China has come down by about 65-70% in the recent months, the long-term price of iron ore charged by National Mineral Development Corporation (NMDC) from its domestic customers has declined only 25% during this period.
From a peak of about $1150/tonne in July-August 2008, price of HRC is currently ruling around $400/tonne in the international market, including Ukraine and other CIS countries, a fall of 60-65%. Steel companies can hope for operational viability only if long-term prices of iron ore, coking coal, etc. are brought down by more than 70%.
No doubt, the mining companies would resist any such deep cut in prices, though such prices would still be profitable for them. This explains the delay in the conclusion of long-term price agreements for iron ore or coking coal internationally.
Chinese and Japanese steel mills, which generally lead the negotiations for long-term pricing of these raw materials with the mining majors in Brazil and Australia, have no option but to push hard for getting the miners to accept the reality and agree to a steep cut in prices. After all, if the steel mills go down, that would spell doom for mining companies as well.
In the Indian context, NMDC has so far effected a price correction of only 25%. There is an urgent need for an additional price correction of over 40%. As for coking coal, there are strong indications that the long-term price for 2009 could be settled at around $120-128/tonne. A lower price for coking coal should lead to a proportionate decrease in the price of met coke. The government, on its part, would do well to urge the Chinese authorities to withdraw the export tax on met coke.
Indian steel companies suffer form high costs of capital, energy and transportation, besides inadequate availability of power, natural gas, infrastructure, etc. The falling rupee exchange rate vis-à-vis the greenback is not helping matters either.
India is blessed with large reserves of iron ore. Therefore, the way to effectively insulating domestic steel companies from the wildly fluctuating raw material prices and supplies would be for the government to allocate captive iron ore and coking coal blocks to them.
While it is heartening to note that the new National Mineral Policy proposes such measures for new steel manufacturing facilities, there is urgent need for a one-time measure of making priority allotment of captive iron ore mines/coking coal blocks to existing steel majors that do not have any captive sources for these key raw materials.
The prospect of the proposed additional steel capacities coming up and bridging the widening demand-supply gap in a country investing aggressively in infrastructure, is largely contingent on this.
No comments:
Post a Comment