JSW Steel Ltd and Steel Authority of India Ltd hiked prices between 3% and 5%, Reuters reported on Monday. It’s not hard to guess the reason.
Prices of iron ore, a key ingredient, have been gaining steadily since July, squeezing steel producer margins. Floods in Australia have now added to the woes. Prices of spot Chinese iron ore (with 62% iron content) rose some 20% in the quarter ended December as demand eased in developed markets and India banned exports, adding further pressure to the margins of steel makers.
Spot prices of coking coal, the second key ingredient, have jumped 10% to $256 (Rs11,445 today) a tonne over the past month as monsoon rains in Queensland, the heart of Australia’s coal production territory, disrupted mining and transport. Australia accounts for two-thirds of world coking coal exports and the flood-hit region for 40% of that country’s output. So roughly a quarter of the world coking output is shut down. There is also uncertainty on resumption of supply. Once business is back to normal, the situation should improve.
Graphic: Yogesh Kumar/Mint
Indian steel makers are heavily dependent on foreign coal. According to estimates from Gujarat NRE Coke Ltd, at least 60% of local coking coal demand is met through imports; of this, 85% comes from Australia.
To be sure, steel manufacturers tie-up coal supply through quarterly contracts and the rise in spot prices may not have an immediate effect. However, traders and analysts estimate that contract prices could rise up to $300 a tonne for the June quarter compared with the $225 for the three months ending March.
For the September 2010 quarter, raw material costs for the top 10 local steel makers rose to 45% of net sales, compared with 42% a year ago. With miners holding pricing power, this ratio is likely to increase over the next couple of quarters.
While some steel makers such as Tata Steel Ltd will be less affected as they have captive coking coal supply, others have no option but to import. Expect more price increases on the way in the near term.