By virtue of their owning high-quality iron ore assets across continents and controlling two-thirds of the global supply of the commodity, the world’s three leading miners have the sinews to force changes in sale contract terms, overriding any objections by steelmakers. China, which imported 618.64 million tonnes of ore in 2010 to supplement the increasing domestic supply of the mineral, remains unequivocal in its criticism of shorter-term contracts allowing miners to reap huge profits as steelmakers see their margins shrink.
That the complainant has a point is not to be denied. Even while foreign origin ore buying by China (the world’s biggest producer and consumer of steel) fell 1.4 per cent last year, the import bill climbed as much as $29.28 billion to $79.43 billion, thanks to the average import price rising 61 per cent to $145 a tonne. This ballooning of the import bill squeezed the Chinese steel industry’s profit margin to 2.9 per cent in 2010 from 7.3 per cent in 2007. Incidentally, the average profit margin of all industrial enterprises in China last year was 6.2 per cent.
Shrinking margins apart, short-term iron ore contracts -- miners are now seeking further migration to monthly contracts -- are creating issues for steelmakers vis-a-vis customers for steel products. Automobile companies are not comfortable with frequent revisions in steel prices because of the unsettling impact on their financial planning. Tata Steel managing director Hemant Nerurkar says “we are still resisting it (monthly contract) as our customers do not like it”. Steelmakers complain that frequent changes in iron ore and now also coking coal prices are causing a distraction from essentials like customer service and product development to raw material inventory management.
Miners say prices of minerals are finally being decided by the marginal cost of supply. But if that be the case, why is this unending verbal duel between miners and steelmakers? ArcelorMittal has served a notice that the new price arrangement will spur steelmakers, obviously of some size, to seek vertical integration from mines to the metal. Here, SAIL and Tata Steel remain in the comfort zone for they are able to take out enough iron ore from their captive mines to support their full steel production. As for supply of coking coal from internal sources, Tata Steel with self reliance of 45 per cent is better placed than SAIL. Both SAIL and Tata Steel remain on an asset sweating mission. But, the benefits accruing from this exercise and also the reduction of headcount, mostly through natural separation, is being negated by raw material price inflation.
In this context is to be seen SAIL chairman CS Verma’s focus to get SAIL, now in the midst of expanding capacity to 24 million tonnes of crude steel by 2012-13 and also armed with a perspective plan of taking capacity to 60 million tonnes by 2020, ringfenced from raw material supply uncertainty at any point in future. Verma is as keen to get the remaining leases for Chiria and Gua iron ore deposits renewed as he is to acquire coal assets here and abroad, either independently or in partnership. Since Tata Steel’s projects in Orissa and Jharkhand are linked to commitments of state governments to give access to adequate iron ore deposits, self reliance in one principal mineral will stay. But, according to Nerurkar, there is “complete chaos” in the allotment of coking coal deposits because of policy “flip-flops, the go and no-go areas and confusion between state and Central clearances.”
Africa will be the next iron ore frontier. Though it holds 20 per cent of the world’s iron ore resources, it has barely a 2 per cent share of global trade in the commodity. Many African countries steeped in poverty rely on mineral exports as the principal source of foreign exchange income. China, which is miles ahead in the race over western countries, including the US, in securing rights over all kinds of minerals in Africa, is still seriously engaged in the game. But whether Africa will be able to live up to its potential as the next big supplier of iron ore will depend on how quickly a supportive infrastructure is created and political hurdles are overcome.
Steelmakers are figuring out as to how soon the world market for iron ore will move from the current tight supplied to an oversupplied situation. High returns from iron ore in the last several years have attracted large investments in the development of new mines and expansion of working mines. In the next couple of years, the world will start seeing the release of much new capacity. China is taking the view that the mining leaders might be owning lots of high-quality ore, but they certainly do not reign over all of the world’s resources. The Chinese target is to become “less and less dependent on the big three for ore as it raises its own production and goes to new places for imports”. Mind you, this is no pantomime jingoism. The yearning to become a multinational steel producer is leading Verma to Indonesia and Afghanistan, where he hopes to get linkages to coal and iron ore deposits.