High raw material costs force them to share cost with users.
We are living in difficult times, caused among other things by stiff inflation in almost the entire commodity basket. What is unavoidable in this situation is trading of charges and the defence put up by contesting parties as we are now seeing happening among users of steel and its leading producers here.
The issue involved in the case of steel is a lot more complex than the unsubstantiated accusation that the leaders in the steel industry are engaged in confabulations every time they would mark up prices of hot rolled coils, used in the making of white goods to automobiles to pipes. But a cartel, if in operation is a bad trade practice and it should invite the baleful attention of the government.
A little earlier than our steel pipe makers expressed concern about “unjustifiably rapid rises in HR coil prices of late” for which they suspect a cartel is in operation, their counterparts in Russia moved their country’s federal anti-monopoly service with complaints that the more recent mark ups in steel strip prices by Severstal – it incidentally is in talks with NMDC to build a mill here in a joint venture – and another group are more than raw materials prices revisions would warrant.
At least in the case of Russian pipe makers, their submission has some points meriting sympathy. They have their compulsions to ask for long-term steel purchase contracts since the metal alone accounts for up to 80 per cent of production cost of pipes. Such contracts in Russia are now mainly on monthly basis. They are arguing that any “arbitrariness” in steel prices fixing results in compromise of pipe manufacturers’ competitiveness in the world market. At the same time, their margins from sales in domestic market also come under pressure.
Before we go into the justification or the lack of it for some major steel price revisions this year, the fact remains that buyers of HR coils instead of insinuating that SAIL, Tata Steel, JSW and Essar are acting in concert in fixing prices should have done some analysis of the cause of steel price inflation. Secondary steel and pipes producers find it “puzzling” that the four principal producers who between them make about 20 million tonnes of HR coils are revising prices in the same range and virtually together. This builds up “suspicion of a cartel in operation.” Some of the complainants have also threatened to take the issue to the Competition Commission.
Instead of going overboard on the issue, steel users should have done well to take into account the reality that the world’s leading producers of iron ore and coking coal could earlier virtually arm twist steel makers into accepting quarterly contracts instead of longer term annual price settlement. Mineral producers favour short term arrangements – many of them are now talking animatedly about moving contracts to monthly basis – to bring contract prices in close approximation to spot prices. BHP in particular is selling hard the monthly contract idea by advancing the argument that this will not bind steelmakers to three-month prices in a falling market. Global miners are using iron ore indexes, based on spot transactions in China, to arrive at quarterly contract prices.
The shortening of contract validity period has globally put strains in steelmakers’ relationship with their clients who buy in bulk like automakers. What must, however, have come as a shock to steelmakers here is the tenor of criticism of some buyer groups. Tata Steel managing director H M Nerurkar has earlier given the warning that steel prices would remain volatile as these are decided by quarterly rates for iron ore and coking coal.
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Indian steel users should not lose sight of the dynamics of steel raw materials market. To give one example, spot iron ore prices fell 15 per cent after climbing to record highs of nearly $200 a tonne in mid-February. If price falls are largely attributed to China applying brake to buying because of high prices, the slow price recovery now is linked to Chinese mills beefing up iron ore inventory. Cuts in Japanese steel production in the wake of the devastating quake proved to be a damper for the ore market. But are not Chinese steelmakers preparing themselves to export the metal to Japan as reconstruction there begins?
Or take coking coal, which continues to add high inflationary pressures in the steel sector. Compare the April-June delivery price of $330 a tonne contracts which Anglo-American could settle. This is 47 per cent above the first quarter price and $30 a tonne more than the earlier record for the mineral. During 2009-10, coal and coke accounted for 35 per cent of steel production cost of SAIL while the share of other raw materials was 15 per cent and of power and fuel 10 per cent. Scan the balance sheets of SAIL and the other three steelmakers who the steel users are trying to put in the dock, you will find all of them are relentlessly fighting inflation through efficiency improvement. Developments on raw materials front leave steel producers with no option but to ask steel users to share cost escalation burden.