India: Steel majors to push for input price cuts

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31 Mar 2009

It marks a distinct shift in bargaining power, perhaps for the first time in years. With barely a day to go for annual price contracts for FY10, domesticsteelmakers — Sail, JSW Steel and Ispat — are gearing up for intense negotiations to induce price cuts of 40-70% on key raw materials such as iron ore and coking coal. The situation is in contrast to what steelmakers globally have had to live with since 2003-04, when they had to settle for 70-90% jump in long-term contract prices of iron ore and coking coal.
Starting April 1, 2009, domestic steel companies will be clamouring for price cuts on inputs, taking cue from recent deals between Japanese and Chinese steelmakers and global suppliers like BHP Billiton, Rio Tinto and CVRD of Brazil, who have agreed to drop prices by nearly 50-60% over last year. However, the new price contracts will be finalised by April-end.
 “Globally, input prices are being adjusted downward by Australian and Brazilian miners, mainly based on demand from Chinese buyers. This would give Indian steel producers a stronger hand at the negotiating table when annual price contracts are finalised,” Angel Broking’s base metals research analyst Reena Walia told ET.
 “Australian coking coal majors have settled coking coal prices with Japanese steel mills. These become benchmark prices. We are shortly going to conduct meetings with global suppliers and hope to finalise long-term contract prices by April end. However, considering the current economic environment, prices should be anywhere between $90-100/tonne,” a top executive of Steel Authority of India (Sail) said.
Sail is one of the largest importers of coking coal from the US and Australia, amounting to nearly half of India’s total imports of 21.5 million tonne. Average coking coal prices jumped from $96 in 2007 to $300 per tonne in 2008. Recently, BHP Billiton signed coking coal contracts with Japan’s Nippon Steel at $128-129 per tonne, down 57% from a year ago.
While Sail and Tata Steel have captive ore, companies which buy ore from the market feel prices should be revised downward by least 40%. “Though demand for steel has started picking up, margins continue to remain under pressure, as steel prices internationally have slumped. So, iron ore prices should be brought down by at least 40% to prevent margins from falling further,” Ispat Industries director (finance) Anil Surekha said.
While India’s iron ore producer and exporter, NMDC’s high quality ore is priced at $75, globally, prices have fallen to $65-70 per tonne from over $200/tonne in March 2008. NMDC is negotiating long-term contract prices with Japanese steel mills, which is set to emerge as benchmark price for the domestic market as well.

Source: The Economic Times