Iron ore prices have fallen 33 per cent, coking coal prices have gone down 60 per cent.
Steel companies can finally breathe easy. At least three companies — JSW Steel, Ispat Industries and Essar Steel — are likely to enter into long-term raw material purchasing contracts soon and the savings on input costs could be as much as 40-50 per cent in this financial year.
This is because, in the last one year, iron ore prices have fallen 33 per cent — the first drop in seven years, while coking coal prices have gone down 60 per cent. Spot iron ore and coking coal prices slipped below long-term prices in late 2008. In addition, crashing freight costs should also yield lower costs for steel producers everywhere.
The reduction in expenditure is expected to help steel makers increase their profit margins and, according to some, may also prompt them to consider a reduction in prices.
“The Indian steel sector is expected to pick up this fiscal as domestic sales are steadily rising led by infrastructure and construction demand. Moreover, steel imports have fallen because of global production cuts, import restrictions and possibilities of safeguard duty. With the reduction in raw material costs of over 40 per cent, Indian steel-makers are expected to perform much better than last year,” Edelweiss’ Vice-President Prasad Baji said.
Sales of listed Indian steel companies rose 16 per cent to over Rs 1 lakh crore during 2008-09, while expenditure increased 25 per cent. The raw material cost shot up 36 per cent during the period.
JSW Steel Joint Managing Director Seshagiri Rao said that the correction in prices has not yet completed, considering 2007 levels.
“The cost of production is still high as coal prices were $96 a tonne before the downturn, compared with the current price of $128. Even iron ore prices are currently hovering around $61 a tonne — they were around $51 in 2007-end. Since steel prices fell 60 per cent in one year, we expect raw material prices, especially iron ore prices, should come down further to make steel-making profitable,” he said.
India’s largest miner, state-run NMDC, supplies iron ore to JSW, Essar and Ispat in addition to what it supplies to Japanese and South Korean steel companies abroad. About 90 per cent of the coking coal requirement is met through imports, especially from Australia, South Africa and the US.
An official with NMDC said the long-term contracts, expected to be signed this month, would be at the provisional price, which was fixed in December after an average cut of 25 per cent.
“Indian buyers are demanding more cuts in tune with the global contracts that were recently signed between Japanese steel makers and Rio Tinto. Since the Indian steel price has not fallen to the global level, a final decision has not yet been made,” said the official, who did not wish to be quoted.
Rio Tinto became the first of the three big iron ore suppliers to agree to a 33 per cent cut in the benchmark iron ore price starting April 2009 with Japanese mills, including Nippon Steel as well as South Korea’s Posco. However, China bucked the protocol and rejected the agreement. China Iron & Steel Association (CISA) is insisting on cuts of at least 40 per cent, taking it back to at least 2007 levels. Rio’s competitors BHP Billiton (BHP) and Vale of Brazil have yet to announce any similar deals. Taking these deals into consideration, NMDC fixes the prices of its long-term contracts.
Steel production and prices plunged in recent months as the global economic downturn has battered demand. The sharp drop in steel prices has squeezed the margins of steel-makers, resulting in poor earnings last financial year.
