Indian steelmakers complain that they have not been able to pass on the incremental cost of making the metal, principally on account of coking coal, to consumers. In spite of the reforms, New Delhi still considers its right to monitor movements in steel prices to check any undesirable stoking of inflation.
Rajeev Jhawar, managing director of Usha Martin, the country’s leading producer of special steels and among the world’s largest makers of steel wire ropes, says the marginal five per cent import duty on steel products leaves little elbow room for producers to seek full compensation for cost rises through price revisions.
For instance, wire rope is among the highest value added products for Usha Martin, with a near monopoly position in the domestic market. But, whatever the cost pressure, imports from China, have to be kept in mind.
The rate of steel determines the price of wire ropes. Generally owing to low import duty and fear of being ticked-off by the government if user groups cry foul over steel price revisions, many in the industry have taken to backward integration up to iron ore and coal mining to rein in costs.
Malay Mukherjee, CEO, Essar Steel, made an insightful remark that groups planning investments in steel will not place orders for equipment till the state governments concerned have made unequivocal commitment on raw materials, which means giving access to iron ore and coal deposits.
Even while a good portion of steel made by Usha Martin gets converted in high value added products commanding premium prices, the company wisely sought self-reliance in iron ore and DRI grade coal to be assured of an Ebitda of 20 per cent on a sustained basis.
Unlike many steel companies with iron ore mines, it has not taken Usha Martin much time to start building a pellet plant of 1.2 million tonnes capacity in order to put to good use the fines generated in the process of mining ore.
To discourage iron ore exports, the government raised export levy on fines to 20 per cent from five per cent, permitting at the same time duty free export of pellets on value addition ground.
The world steel industry takes its guidance from ArcelorMittal, not only for size and rich product profile, but also for its operations in more than 60 countries. Announcing its first quarter (January-March) working, which saw seven per cent improvement in steel selling prices, compared with the final quarter of 2010, four per cent rise in steel shipments and a jump of 67 per cent in net income to nearly $1.1 billion, ArcelorMittal sounded positive about the second quarter.
Combination of continuing improvement in underlying demand and seasonal factors, according to the company, will allow steel prices to be so pegged this quarter as to more than "offset cost increases." The industry in the meantime is reconciled that increase in raw material prices will continue to send costs higher through the rest of the year. The point not to be missed is that steel makers have regained their price fixing capacity.
Equally important, in line with progressive re-commissioning of capacity laid idle during the scary recession of 2008-09, ArcelorMittal will see its capacity use rising to 80 per cent. Lakshmi Mittal says ArcelorMittal remains “confident that 2011 will be a stronger year than 2010.” Earlier, World Steel Associationforecasted that global steel use in 2011 will rise 5.9 per cent to 1.36 billion tonnes after a post recession consumption surge of 13.2 per cent last year. Next year, according to WSA, demand will further score a growth of six per cent to a record 1.441 billion tonnes. Capacity use and steel prices are demand-driven. Mittal opinion and WSA guidance should bring cheer to our steelmakers seeking compensation for raw materials cost rises through product price revisions. Many, however, nurse doubts if all cost rises could be defrayed.
A point that could not have been missed by our steel makers, self-reliant in iron ore and partially so in coal is ArcelorMittal separating out for the first time in last quarter profit contribution from mining.
According to Mittal, breaking out of mining results will allow the company, the world's fourth biggest producer of iron ore and also a significant coal miner, to "better judge how each division performs."
As a follow-up to this, ArcelorMittal’s steel division will no longer have automatic access to internally mined products if the mining division could earn greater revenue by selling the minerals in the open market. The shrewd mind that he is, Mittal will let the steel division have the comfort of getting supplies of minerals on a cost-plus basis only if these could not be "practically sold to third parties" because of logistics issues. Will our steel companies find this plan worthy of emulation?
