There’s a case for Indian steel majors to cut prices
The iron and steel industry had a very good time in the last few years because of high economic growth in India and other developing countries. Because of unusually high demand from China, prices of steel and all raw materials required for steelmaking shot up to unrealistic and unsustainable levels.
Based upon huge reserves of iron ore (about 20 billion tonnes) in India, many major steel producers in the world proposed to set up large integrated steel plants here, and almost all existing steelmakers in the country planned for expansion. This led everyone to believe that the target of 110 mt of steel production by 2020 could be achieved much earlier, by 2012.
Only a few months ago, steel was considered as one of the factors contributing to inflation. However, with the recession in global economy, prices of steel and its principal raw materials have fallen sharply. Export price for iron ore fines in spot market has dropped from $147 in March ’08 to $55 in March’09. Prices of imported hard coking coal have come down from $305 in 2008-09 to about $130 in 2009-10. Higher prices of steel were attributed to higher prices of iron ore and imported coal.
The expectation now is that prices of steel should come down. However, the relationship between steel prices and the cost of raw materials is a little more complex; it is not linear. Steel prices were mostly market-driven and cost of inputs in the Indian context was not the determining factor for price of steel. Let us see how.
In the first place, the cost of steel was market-driven. The international demand was huge. Then, all major steel producers had assured ore-supply arrangements that shielded them from market volatility. SAIL and Tata steel, two major steel producers in the country, have their own captive mines, and increase in raw material prices in open market has little or no impact on their operations.
NMDC, a PSU under the ministry of steel, meets full requirement of iron ore of other major steel producers like RINL, ESSAR Steel and Ispat Industries and 40-50% of JSW steel on long term prices, valid for one year. Therefore, all major steel producers in the country were largely unaffected by abnormally high volatility in iron ore prices in spot market that primarily catered to the demand from China.
Reduction in the demand from China, as also China’s dependence on Indian Iron ore has resulted in reduced exports from India and consequent drop in price. Long-term prices are determined based upon the provisions of long term supply agreement between NMDC and its customers, and were much below the spot market prices. These are revised once in a year while steel prices are revised frequently.
It can, therefore, be seen that raw material prices had little bearing on the pricing of steel, in good times. But with the recession in the world economy and reduction in demand there is considerable pressure on pricing of steel.
Steel producers may now opt for ‘cost push’ pricing mechanism to push sales and keep the utilisation of created capacities high. Since iron ore is available in plenty in India and the raw material prices are much lower, there is a case for price-reduction of steel and passing on the benefit to consumers.