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Cost of iron ore set to go up by 65 per cent in 2008.

Come April, steel prices are likely to skyrocket on the back of an expected 65 per cent increase in iron ore prices.

Domestic steel producers without captive mines source most of their iron ore requirement from NMDC and Kudremukh Iron Ore Company (KIOCL) which are expected to bring ore prices at par with international rates effective April 1.
According to reports, Brazil’s Vale and Japanese mills have agreed on a 65 per cent increase in prices and Chinese mills are also understood to have accepted it.

Among the major producers, only Steel Authority of India (SAIL), Tata Steel and a part of JSW Steel and Jindal Steel & Power’s (JSPL) requirements are sourced from captive mines.
Jatinder Mehra, chief executive officer, Essar Steel, said,”For every tonne of steel, 1.6-1.8 tonnes of iron ore is required and that will be the extent of impact on steel prices.”

Essar Steel has no captive mines but Minnesota Steel, which it acquired last year, is said to have reserves of around 1.4 billion tonnes. However, Minnesota is yet to be developed.
Sushil Maroo, director, JSPL said, “Once the new contracts become effective from April, steel prices will be increased.” However, he also pointed out that spot prices for fines and lump ore had increased significantly in anticipation over the past year.

From March 2007 to February 2008, KIOCL’s long-term pellet prices have increased 89.23 per cent to Rs 7,623 a tonne while NMDC’s lump ore has increased 32.3 per cent to Rs 3,188 a tonne and 60 per cent fines to Rs 1,783 a tonne.
Steel sources peg the total cost increase over the past year at Rs 6,000-7,000 a tonne on account of raw material price and freight increases.

Steel companies hiked prices in January by Rs 600-900 a tonne and by Rs 2,500 a tonne in February on an average, but had to settle for a partial rollback of Rs 500 for flat steel. Hot rolled coil prices in February were hovering around Rs 31,000 a tonne while landed imports stood at Rs 33,500 a tonne.

“Even before new long-term iron ore prices come into effect, prices are likely to increase next month,” sources said. “Globally, all major steel companies have announced price hikes and the demand looks strong so the market should be able to absorb a hike,” they said.

If Paswan has his way with price controls, investment will flee from India.
The Indian Express: Economics is about supply and demand. Belatedly, post-1991 reforms recognised this elementary principle and allowed supply-side adjustments to ease shortages, logically leading to end of administrative pricing. However, the mindset of price control runs deep and continues to plague everything other than manufacturing. Continuation of the Essential Commodities Act, minimum support prices and the Commission on Agricultural Costs and Prices are instances, not to speak of several services. Even in manufacturing, BICP (Bureau of Industrial Costs and Prices) tendencies run deep and every ministry attempts to become a ministry for price control, especially when the minister concerned is a non-believer in market forces. At a time when India finds it difficult to justify existence of a Steel Ministry, Ram Vilas Paswan contributes to more damage.

The UPA is paranoid about inflation, though WPI-based point-to-point inflation is now only a shade above 4 per cent. At FICCI’s AGM, the prime minister argued that untamed inflation may hurt growth. Even more certain is the proposition that the UPA’s untamed inflation-control policies have begun to hurt growth. If petroleum wasn’t bad enough, with oil companies bleeding, we now have steel. Steel companies have hiked prices by Rs 2000 a tonne. This is understandable, since raw material prices, including those of iron ore, have increased and are projected to increase more. If there is evidence of cartelisation and price collusion, that is for the Competition Commission of India to probe. Steel Ministry intervention is illogical. Had Paswan had his way, all steel production would have been in the public sector and prices would have been controlled. Losses would have been bailed out through a steel pool account and exports would have benefited from export subsidies. One might even have contemplated steel rationing to curb demand. Since this isn’t possible, steel producers are being arm-twisted into reducing prices by Rs 500 a tonne.

The government still has long enough arms for the stick to work. However, the implications are serious. Investments in steel won’t be attractive and planned investments may be relocated abroad, say to China. But with growth and infrastructure investments, steel demand will remain. There was a time when India as a steel exporter was a flight of fancy. Comfort levels will be higher if India turns into a steel importer. Left unchallenged and unopposed, that’s the route the Steel Ministry will force the country to take, by distorting resource allocation decisions and conveying false price signals. Reform lessons run only skin deep.

Introduction of long-term debt Markets to finance infrastructure projects, allowing infrastructure Companies to get external commercial borrowings (ECBs), more budgetary allocation for the infrastructure sector and complete duty waiver on imports of construction equipment are some of the things that private players wish for in the Budget 2008-09.

“The Indian infrastructure sector is at an inflection point with immense opportunity for private participation. As the government announces large scale, complex infrastructure projects, the problem of funding becomes acute. The government should consider introducing mechanisms/ instruments that allow long-term funding of projects. To begin with, the external commercial borrowings (ECB) curb should be lifted,” Ankineedu Maganti, director, Soma Enterprise Ltd said. Furthermore, Maganti also hoped that the Budget would do away with the ambiguity in the applicability of service tax in several sectors of infrastructure.

Director, Simplex Infrastructures Ltd, Amitabh Mundhra and Maganti voiced a similar demand when they said that to sustain the growth in the construction sector, import duty on construction equipment should be abolished. This would give the necessary fillip to the construction activities for mega infrastructure projects. Maganti wants duties on materials such as bitumen, steel and cement removed, especially in PPP projects. Meanwhile, Mundhra hoped that the government would live up to its declared focus on infrastructure sector and the budgetary allocation for the sector would be substantially increased.

“The budgetary allocations have never been enough for the sector. Hope this time it (allocation) gets better and the funds are properly utilised and projects implemented,” Mundhra said.Investment requirement for infrastructure projects in the Eleventh Plan has been projected at Rs 20,18,709 crore ($492 billion). This is 2.45 times the amount of Rs 8,22,193 crore invested in the Tenth Plan.

In the current Plan, it has been estimated that the public and private sectors would require a debt component of Rs 9,85,702 crore ($240bn). Total availability of debt funds to finance infra projects is estimated at Rs 8,25,539 crore ($201bn) which leaves a gap of Rs 1,60,164 crore ($39bn).