New Delhi: With international iron prices rising by over 60-65% since December 2007, steel companies have been struggling to meet rising production costs. But a solution may now be in sight for them. The steel ministry says iron ore producers and steel makers have agreed to enter into long-term contracts for price and supply. The move aims to insulate steel producers from volatility in iron ore prices.
Steel secretary P.K. Rastogi says producers of iron ore and steel have come to an in-principle agreement to enter into long term contracts. “The finer details of the same are being worked out. But this will go a long way towards assuring a fixed supply to steel companies at fixed prices,” he says.
It takes 1.6-1.8 tonne of iron ore to produce a tonne of steel. The current price of iron ore in the international market is about Rs6,000 per tonne. It is expected to rise further by 20-30% as international iron ore producers like Vale and Rio Tinto have announced price increases for Asian countries. Domestic prices in India are expected to rise following the increase in the international prices.
In such a scenario, long-term contracts seem imperative for Indian steel companies, who have been asked by the government to maintain prices at levels lower than the international prices despite rising input costs. As a result the price of steel in India is about Rs 36,000 per tonne which is Rs 15,000 to Rs 20,000 lower than international steel prices.
Long term contracts have worked well in favour of companies like Rashtriya Ispat Nigam Ltd. that procure iron ore from the state run National Mineral Development Corp. (NMDC). RINL gets iron ore at around Rs 2500 per tonne, which is one-third the prevailing international price. “This is the way businesses are conducted. Prices may rise in the short term, but one has to take a long-term view,” says NMDC chairman and managing director Rana Som.
NMDC too is looking at revising prices though. It raised iron ore prices by 47% effective 1st October 2007, and is likely to increase them further owing to global pressures.
Iron ore and steel producers have already met twice in Bangalore and Calcutta last month. But no details about the terms of agreement, such as frequency of price revisions and the formula for linkage to international price movement, have been disclosed yet.
Refusing to give a timeline for the talks, the steel secretary says the two sides are holding meetings and are likely to reach a decision soon.
While there is no denying that the in-principle agreement is indeed good news for steel producers, there is still a lack of clarity on how the proposed mechanism would resolve certain issues. For instance, if prices are revised too frequently, steel companies may still have to face volatility. The final agreement is expected to resolve this and other such issues.