Mumbai | March 08, 2016: A sharp rise in global iron ore prices on Monday has put pressure on domestic iron ore mining companies such as NMDC to increase prices of the commodity.
Globally, iron ore prices (of 62 per cent ferrous content) shot up 19 per cent to $63.74 a tonne (Rs 4,270 a tonne at rupee-dollar rate of 67) on Monday, taking year-to-date gains to 46 per cent, exerting pressure on NMDC which has not revised prices since December.
The state-owned miner has kept its lump ore priced at Rs 1,800 per tonne in the last three months after a downward revision from November price of Rs 2,100 per tonne. The gap between domestic and global iron ore prices is huge, giving good leeway to NMDC. Global iron ore price trend is one of the several factors - apart from domestic demand-supply equation, the import scenario and currency fluctuation - NMDC takes into consideration before reviewing prices.
The rise in global iron ore prices is mainly because of a steel supply deficit and better margins required to increase production ahead of the Chinese peak demand season starting in the second (April-June) quarter," said Goldman Sachs in a report.
Meanwhile, NMDC has chosen a wait-and-watch approach till it's confident on the prevailing trend. "No decision on iron ore price revision has been taken so far and the price review meeting is scheduled to be held on March 15… Till then we are closely monitoring the global iron ore price trend," said an NMDC official.
NMDC is India's single-largest iron ore producer. This makes the company's production and pricing trend crucial for the domestic iron ore and steel industry. NMDC produced 25 million tonnes iron ore in February, up from about 20 million tonnes production in December, indicating rising demand from the local steel producers.
"Global iron ore prices could not have stayed low for any longer and were bound to rebound," said a top official from Bhushan Steel. "How long would global steel companies continue to make losses? This rally was expected. What needs to be seen is whether this rally is sustainable," he added. Steel prices, too, are up since their recent bottom in mid-December. For instance, Chinese domestic hot-rolled steel prices have risen from $282.55 a tonne in mid-December to $319 in late January and, since then, further to $395 currently. Overall, domestic steel industry seems to be playing down the impact of rising iron ore prices. Rise in iron ore prices would compel steel producers to raise their product rates in a market where they feel the demand for the alloy is still not strong.
"We do not see the need for upside change in local iron ore prices," said Jayant Acharya, director commercial with Sajjan Jindal-led JSW Steel. "Also, when prices internationally had slipped below $40 a tonne, the domestic iron ore prices were not corrected downwards. So it's already higher," he added. JSW Steel has no captive iron ore mines and relies entirely on e-auctioned and imported iron ore to feed its 14.3 mt steel capacity.
Other domestic primary steel producing companies such as Tata Steel and Steel Authority of India have captive iron ore mines and hence remain insulated from fluctuations in the pricing scenario of the commodity.
"There is no fundamental reason to support iron ore price hike in the domestic market. Demand for steel is not so strong in the local market," said the official with Bhushan Steel. Margins of domestic steel producers are already under pressure because of not-so-strong steel demand. An upward revision in their product prices would only add to their woes. "A product price hike due to rise in iron ore costs is simply passing it on the cost to the consumer. It does not benefit steel companies. Had the product price trigger been from increased demand for steel, only then would it be beneficial for their (steel companies') margins," said Sanak Mishra, secretary general & executive head of Indian Steel Association.
Heavily-indebted domestic steel industry recently received support from the government by way of imposition of minimum import price for a slew of Chinese steel products that crippled local producers, bringing down their capacity utilisation and earnings. At present, domestic hot rolled coils are priced at $500 per tonne as against $390-395 per tonne in global market to which a customs duty of 12.5%, safeguard duty of 20% and other slew of duties are to be added. However, the global price trend is not much watched by local producers at present due to the prevailing MIP which stands at $452 per tonne for this product. The question thus remains, will NMDC stay put or raise iron ore prices?
(Source: http://www.business-standard.com/)