Rising raw material prices are a small worry when demand is in a runaway mode. In the steel industry, however, while China’s appetite for minerals is driving up prices of resources like iron ore and coking coal, the global demand for steel is not increasing at a similar pace. Slower economic growth in the US and European markets are capping how much steel prices can increase by. The higher raw material prices are a worry for global steel companies, especially those selling in developed markets. Large Indian steel companies, especially those with captive resources, will see their domestic market operations become more profitable, depending on the increase in steel prices.
Also See Beating The Bellwether (Graphic)
The conclusion of recent price negotiations with Japanese steel makers appears to have seen a near doubling of iron ore contract prices. What’s more, BHP Billiton Plc has announced that it has signed agreements with steel makers that will allow it to reset prices at shorter intervals. Other mining companies such as Vale, too, have signed contracts with shorter resets. The new iron ore price benchmark is believed to be around the price range of $100-110 a tonne. Higher prices were a foregone conclusion as spot prices have risen sharply. Coking coal contracts for the year have been reset at nearly 55% higher than in 2009.
What does all this mean for Indian companies? Iron ore companies will benefit as the global benchmarks will translate to higher realizations for them, too, though their sales on the spot market are already getting them better realizations. Shares of companies such as Sesa Goa Ltd have already run up anticipating a better performance during fiscal 2011. Steel producers will see their costs go up depending on their captive resource availability for iron ore and coking coal.
Tata Steel Ltd’s domestic business and Steel Authority of India Ltd are comfortably placed on the iron ore front, though higher coal prices will have a partial impact. JSW Ltd will see its costs go up as it buys a significant portion of its inputs. But Tata Steel’s European business will pull down its consolidated results as it buys its raw materials and operates in a region where economic growth is weak. How steel prices move in the next few quarters will give a clearer picture of steel company performances in fiscal 2010.
All these companies are in the process of increasing their captive resources of raw materials. Tata Steel, for example, expects to get 4 million tonnes of ore per annum from its Canadian project from May 2011.
Write to us at email@example.com
Graphic by Yogesh Kumar / Mint