New Delhi: The way steel makers price their output is set to change because they no longer want to absorb increases in the cost of raw materials, and because their customers want to benefit from drops in the prices of raw materials that should result in a lower price of steel as well.
Executives at steel companies and an expert say the move will have an impact on products such as automobiles and consumer durables.
Currently, steel producers revise spot prices every month and offer long-term prices on quarterly and biannual contracts. Big buyers—makers of automobiles and consumer durables—prefer the stability of long-term contracts as that helps them manage costs better.
Over the past two years, shortages, bottlenecks and Chinese demand have led to shorter duration pricing of iron ore and coking coal. With the prices of these crucial inputs becoming more volatile, steel makers say they are being forced to be more nimble with their own price changes.
“Traditionally, they (companies) have been pricing steel to large automotive and other OEM (original equipment manufacturers) customers based on long-term annual contracts,” said Arvind Pandey, partner and managing director at Boston Consulting Group. “We are advising steel companies to explore new ways of managing their customer contracts and pricing as they need to be more flexible with their pricing.”
The prices of the two steelmaking ingredients—ore and coal—are expected to remain volatile and the pressure to change pricing dynamics is being felt most by non-integrated companies who have no captive mines, Pandey said.
An integrated steel company is one that has its own iron ore mines.
While monthly prices have become more a benchmark than the actual level at which trades take place, long-term contracts with attractive rates designed to reward loyal customers are beginning to hurt, according to executives at steel companies.
“Today we are offering monthly pricing. Some customers are getting quarterly or half-yearly pricing. This may undergo a change. There is no option,” said Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel Ltd.
“As soon as (global) coal suppliers move to monthly pricing from quarterly, the shift will happen (in steel prices).”
Large coal and iron ore suppliers are pressurizing steel makers to move to monthly from quarterly pricing, having shifted from yearly pricing a few years ago in a traditional tussle, in which the raw material producers seem to be having an upper hand.
The trend is already taking hold as spot prices are being closely scrutinized by buyers of steel.
“Even monthly prices seem to be” inconsistent, said an executive at one of the top five steel producers who did not want to be named. “People see on the Internet that others are offering slightly less and come back to us.”
In case coking coal rates ease amid fears of a global recession, long-term clients won’t be happy if they saw spot steel prices falling, the official said.
So, how will steel companies adjust their pricing?
“There could be a surcharge on steel prices much like that on aviation fuel,” said a senior executive at another of the top five steel producers who also spoke on condition of anonymity. “Another thought is to link steel prices to coal indexes.”
In the longer-term, steel prices are unlikely to move like other metals such as copper and aluminium that are traded real-time, said V.R. Sharma, deputy managing director and chief executive officer (steel business) at Jindal Steel and Power Ltd.
“Metal prices are volatile not because of consumption, but because of speculation,” Sharma said, referring to base metals such as copper, aluminium and zinc. “In steel, speculation is difficult owing to its bulk. Nobody can hoard it for four-five months.”
Sharma also said steel availability is greater than other metals, making the alloy difficult to speculate in.
The August price for TMT (thermo-mechanically treated) steel bars of 8mm quoted by Steel Authority of India Ltd is Rs47,000 per tonne, up more than 8% from Rs43,400 in January. Long-term contract prices are kept confidential.
Graphic by Ahmed Raza Khan/Mint