Red alert for metal prices
Business Standard

Commodity prices have gone through the roof in the last three months with the sharpest increase seen in raw material prices for steel.
Metals players say the last three months will pale in comparison to the surge expected in the coming months, impacting India’s construction, automobile and consumer durables industries.

Prices for steel, iron, ore, coking coal and copper are all expected to surge between 15 and 65 per cent from April.

Spot prices of coking coal in the international market since January have increased 58.62 per cent to $230 per tonne till March while Indian iron ore export (one of the benchmark prices) has seen an 8 per cent increase to $146 per tonne during the same period, according to Metal Bulletin Research (MBR) data. Last week alone saw Indian iron ore export prices increase $1 to $4 per tonne from a week ago. The MBR steel raw material index increased from 198.42 for the week ending January 8, 2008, to 229.31 at the beginning of March.

The increase in raw material prices has been reflected in steel prices. Global hot rolled coil (HRC) prices have increased from $686 per tonne to $840 per tonne during the same period. Other metals are not far behind, with aluminium prices increasing 18 per cent to $2,842 per tone and copper at a record high of $8,890 per tonne, an increase of 31 per cent.

Most prices in the international market hold good for the domestic industry. For instance, coking coal, which accounts for 50 per cent of the raw material cost for steel, is mainly imported. Aluminium prices are determined on the basis of landed cost of imported aluminium and copper prices too are dictated by international trends. Domestic steel prices have increased 15 per cent since January and HRC prices to the consumer were ruling at Rs 35,000 per tonne, ex-plant, lower than landed imports from Europe at $950 per tonne, inclusive of the 5 per cent import duty. Steel companies without captive iron ore mines source their requirements from NMDC, the domestic public sector mining company, through long-term contracts. NMDC revised its contracts mid-term with retrospective effect from October and increased prices 47 per cent to Rs 2,409 per tonne.

The common factor in the surge is China, the metal and metal intermediaries guzzler. Around 50 Chinese steel mills and many aluminium smelters have cut production due to a power crisis. With the Chinese government curbing exports, the shortage has only accentuated in the global markets. China is also the biggest consumer of copper and demand is increasing at a fast pace.

R P Singh, general manager (marketing), Hindustan Copper said there is a shortage of copper in the world market. “Copper has hit a record high and by June or July is expected to achieve a new high at around $9,500 per tonne,” he said.

Singh added that domestic copper prices are largely determined by international prices, as 95 per cent is imported. Another reason for the price surge is the position taken by banks and institutions in the commodity market, in the wake of the volatility in the stock markets. Overall, there is a broad consensus that prices will surge further.

Steel companies said that HRC prices would go through the roof. The world’s largest steelmaker, ArcelorMittal has already announced a hike of 12 to 15 per cent for flat products, which go into making cars and consumer durables, with effect from April 1, 2008. Iron ore prices are also expected to increase from April by at least 65 per cent and Australian producers companies could even charge a freight premium. Coking coal prices are set to see unprecedented levels. According to reports, deals have already been struck at more than $300 per tonne and international coking coal companies are looking to increase prices by 40 to 50 per cent from April.

Aluminium could be the lone exception. An industry representative in the upstream and downstream business said, prices would stablise at $2,600 to $2,700 per tonne. He said, the current increase would be passed on to the users of the material. “It is impossible to absorb such high costs,” he said. For steel users, the Budget has provided some relief in the short-term. Venugopal Dhoot, chairman, Videocon group, said the increase in steel prices is not affecting consumer durables prices due to the cut in excise duty. He however said, any further increase in steel prices would be passed on to the consumer. Binod Agarwal, president, Federation of Automobile Dealers Association of India, said, if input prices increase further, automobile prices would go up after a while.

High steel prices: what can the government do?
Financial Express

User industries may not be happy, but, one will have to get used to high steel prices for some more time to come. Supply side constraints are going to be more severe in the days to come for steel, iron ore, and coking coal. The government cannot perform any miracle. It does not have any market friendly policy instrument that can make a significant difference.
Supply can be increased by waiver of import duty on steel and creating special provisions for moving steel out of the port to various parts of the country. A concerted effort can encourage steel or steel scrap imports. Revenue losses can be covered from the excise duty levied on higher base prices.
With steel production starting to lag behind consumption, the situation in the country is not expected to improve any further. If infrastructure projects are to be on track and industrial production and construction are not to be affected, the supply of steel at whatever price is to be maintained. In the absence of adequate imports, steel shortages will hit the user industries hard and with their strong forward linkages with other important sectors in the Economy, it will add to the mild recessionary conditions in several sectors in the Economy.
Conditions in the rest of the world are similar. While steel makers are feeling the pressure of high raw materials prices, the steel user industries have been hit hard by the surge in steel prices on the one hand and the fear of a possible slowdown in demand for their own products in the days to come.
The Chinese government, with its active intervention, has been able to keep the domestic steel prices lower by as much as 10-20%, depending on the product than the prices at which they are importing or exporting. The Chinese have not exported as much as is possible despite rising stocks in many places and in many products. They have been able to maintain conditions of relative glut in their own country, whereas the rest of the world is faced with a huge shortage. Therefore, Chinese steel user industries have been able to maintain their cost competitive edge in steel-based industries. This will help them in the days to come when the market will turn competitive for them in the face of global recession. Most countries with high steel prices will lose out. The impact of recession will be harder .
of some relief for the rest of the world is that
China still has a lot of surplus production and despite restrictions, significant quantities are on the world market. Minus this, steel prices would have been another few notches higher than what they are
now.

Interestingly, even in the best days of steel prices, there are reports of induction furnaces closing. Reasons? They are squeezes between the scrap and DRI suppliers on the one side and the dominant rolling mills on the other. Supply of billets from the secondary sector has fallen leading to a corresponding drop (or stagnation) in the production of rebars. The result has been seen well. The prices of TMT around Delhi has jumped to over Rs 43,000 a tonne, tax paid. These market prices are pegged on the landed costs of import of the same.
It is necessary to help the secondary sector to survive. If the government is in a benevolent mood, it can think of a package to save them. The government should also act to discourage excessive dependence on steel. One needs to move now from active promotion of it to recycling and judicious use. The government needs to support such programmes. It is time now to focus on the adverse implications of the unwarranted growth of mineral-based industries. Irrespective of who owns or runs the mines, growth of the mining industry will have to be carefully calibrated to the overall requirement for sustainable growth.
The author is strategy consultant: Steel, Minerals,
and Coal...