BackSurging steel prices to hit local auto, construction firms hardest
Surging steel prices to hit local auto, construction firms hardest
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China’s massive appetite for steel coupled with increasing international freight costs have seen prices of iron ore soaring by 86% since January this year. Analysts said the increase would lead to a surge in global steel prices and impact end users such as the construction and automobile industries in the long term at home.
According to figures released by the China Chamber of Commerce of Metals Minerals and Chemical Importers and Exporters, Chinese FOB (freight on board) spot prices of ore touched $104 per tonne Tuesday from $56 a tonne in January.
In the past month alone there has been a dramatic 20% rise in the price. India exported 6.24 million tonnes (mt) of iron ore in July, slightly lower than the amount it did in the previous corresponding period, but overall export volumes have gone up by 10.2% over last year.
A representative of mining company China Minmetals Corp. based in New Delhi, and who did not wish to be identified, said a majority of India’s ore export is sold in the spot market. Of the 70-odd million tonnes shipped to China last year, less than 5mt were based on long-term contracts, he added. Contract prices work out to be cheaper by at least $10-$15 a tonne.
One reason for the increase in price is the corresponding increase in freight costs: the cost of shipping ore between Brazil and China has risen $30 per tonne since January owing to a shortage of vessels; in the same period, the cost has increased $20 per tonne in the India-China sea route.
As China expands and adds 150mt of capacity by 2010, according to estimates by industry tracker World Steel Dynamics, steel companies here continue to lobby hard for an amendment to mining laws for special priority on accessing iron ore mines.
Iron ore requirement of firms in the country is set to rise. One such company, JSW Steel Ltd needs 45mt a year.
Price escalation of iron ore and coking coal, the other crucial input in steel making, will push prices of the commodity, according to steel analyst Ahmad Shah Firoz. “It will continue to move along global players as they up their prices," he said.
Rakesh Arora, analyst at Macquarie Securities (India) Pvt. Ltd, said steel prices will rise 5-6% by next year, but that the markets for automobiles and homes, where steel is used and in demand from the spending middle class, will operate on their own dynamics of demand and supply.
Auto companies such as Hyundai Motor India Ltd, which has an 18.2% share of the market, said an increase in the spot price of steel would not affect the company as its purchases are made on long-term contracts. “But a sustai-ned price increase over a long period of time will require a review of our costs," said Arvind Saxena, the firm’s vice-president for marketing and sales.
The construction sector consumes more than half of India’s steel output, but represents only 20-30% of total building costs. “A 5% increase will not make a dent on overall pricing...; although production costs are going up, finishing details of a building, such as installing a kitchen cabinet or electrical gadgets are coming down," said Arvind Parikh, chief financial officer of Omaxe Ltd.
“It will in the end entirely depend on what costs the steel producers want to pass through," he added.
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