The price of Chinese iron ore imports is down by around 8% in October so far, and by around 13% from early September. If this trend sustains, iron ore producers will see realizations and margins fall, offset in part by the depreciation in the value of the rupee.
Fears that demand for steel is slowing are leading to a fall in ore prices.
Steel prices, too, are showing signs of softening. The World Steel Association, in its October short range outlook release, predicted that global steel consumption is expected to increase by 6.5% in 2011, higher than the 5.9% growth it had predicted in April.
Higher growth in markets such as China, the US and the European Union were responsible for the increase. India’s growth fizzled in 2011, falling from an estimate of 13.3% to 4.3%.
This scenario has, however, changed in the recent past. Steel mills in Europe are cutting back on production to adjust to lower demand in the region. Steel demand in the EU region is expected to rise by 2.5% in 2012, after rising by 7% in 2011. In the US, steel demand is expected to rise by 5.2% in 2012, after rising 11.6% in 2011.
Also See | Taking a Tumble (PDF)
China is a key player in the steel market, accounting for around 46% of the total demand. In 2011, its demand is expected to increase by 7.5%, and then by 6% in 2012. That would still be respectable growth. But Chinese steel mills are expecting a slowdown in demand. Price trends have turned soft. Spot prices of flat steel (hot-rolled coils) are down by 8% since early September. Platts reported that China’s Anshan Iron and Steel Group Corp. is reducing output because of a slowdown in demand from Chinese and export markets, and also in response to squeezed operating profit margin. If steel output growth slows, the demand for ore, too, will get hit, which explains the fall in prices.
Indian iron ore companies have already been affected by the ban on iron ore mining in Karnataka by private companies. Sesa Goa Ltd will see its output drop substantially in the current fiscal. State-controlled NMDC Ltd is in a relatively better position as it has been allowed to mine iron ore in Karnataka on a limited basis. Falling prices will mean a downward revision in estimated sales and profit growth for these companies.
At present, demand is a bigger worry for steel firms. In April-September, the real consumption of steel in India increased by 1.8%, while production rose by 9.3%. The gap was made up by higher exports. Domestic steel prices are pegged to international steel prices, and if they continue to fall, it will end up hurting realizations and margins of Indian companies.