Mumbai: Indian steel companies are eyeing higher prices in 2010 as stronger economic growth worldwide drives up demand for the critical building material. Some steel makers have already raised prices and are bracing for an increase in the cost of raw materials that go into the making of the alloy.

Firming up: A worker walks past a blast furnace at Tata Steel’s Jamshedpur facility. While Tata has already raised prices by Rs2,000 a tonne, other private steel makers are also expected to increase rates in January. Santosh Verma/Bloomberg

Steel prices could rise next year as the global economy recovers from the slowdown of 2009 that sent the US, Europe and Japan into a simultaneous recession, analysts say. Domestic steel demand is expected to receive a lift from infrastructure projects.

Higher prices would extend a good run for steel makers in India, which has largely been spared the pain that more advanced economies experienced. In 2009, shares of at least 65% of Indian steel companies—a total of 97 steel makers are listed on the Bombay Stock Exchange (BSE)—beat the Sensex, BSE’s benchmark index that generated 80% return through December.

Demand recovery in the US and China has raised hopes of a better 2010 for the sector, said Ajay Parmar, head of research at Emkay Share and Stock Brokers Ltd. “Globally, demand is looking up and, hence, the cost of raw materials has also increased, which has led to the hike in domestic prices," he said.

M.V.S. Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel, India’s third largest steel maker, said earlier this month that steel prices would stay stable. “Prices for steel are very unlikely to go down; at the same time, (they) won’t go up significantly," he said, adding he was expecting a “slight upwards bias because of the cost push".

Analysts are expecting that global prices of coking coal and iron ore, key ingredients in the making of steel, will also be higher than last year.

Sumeet Singhania, metals analysts with Antique Stock Broking Ltd, said that in 2010, the price of these two ingredients could rise as much as “20-30%" from their 2009 averages. “Contracted coking coal prices in 2009 averaged $117 (Rs5,464 now) per tonne. In 2010, it is likely to be somewhere around $180," he said. “Similarly, iron ore is also likely to be higher at $80 per tonne compared to $66 per tonne averaged in 2009."

However, India will continue to be a relatively stable market because of demand from sectors such as construction and automobiles, Singhania said, adding that demand growth would be around 10% compared with 8% in 2009.

The base prices of coking coal and iron ore are set through international negotiations that start at the beginning of the calendar year. Prices for the year are typically set in April for one year.

These costs are the biggest variable Indian firms will have to deal with in 2010, analysts said. “These prices are linked to the international market which in turn is linked to the demand there," said an analyst with a private brokerage who did not be named because he is not authorized to speak to the media.

However, higher costs will not necessarily put pressure on margins since they are starting off from a lower base.

“Raw material costs are higher, but they are not as high as in 2008. Coking coal prices averaged $310 per tonne in 2008 while iron ore prices rose to about $170, the prices expected in 2010 are much lower than that," said Rahul Singhvi, a steel sector analyst with Mangal Keshav Securities Ltd.

In a 1 October report on SAIL, Centrum Broking Pvt. Ltd said the state-owned steel maker expects domestic demand to rise to 65 million tonnes (mt) by 2012 from 56mt for the nine months to October 2009.

“It has been observed that there is a strong correlation between steel consumption and GDP (gross domestic product) growth," the report said.

“India registered the second highest growth rate of 9.4% CAGR (compounded annual growth rate) in steel consumption in Asia, next only to China, during 2002-08," the report said. “India’s GDP is estimated to grow at over 6% (Centrum estimates 5.8%) during FY10 and at a higher pace thereafter. Hence, we believe that going forward domestic steel consumption would grow even faster."

Reuters contributed to this story.