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| Steel makers see red on new input price dynamics |
| Ishita Ayan Dutt / Kolkata Mar 22, 2010, 00:27 IST |
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The rebound in the steel demand may ricochet on manufacturers as suppliers of critical raw materials like coking coal and iron ore jettison the annual pricing system in favour of a floating rate.
For coking coal, BHP Billiton and Rio Tinto are among the leading global raw material suppliers that are pitching for quarterly contracts to replace the 40-year old annual benchmark pricing system.
Two weeks ago, BHP and Japan’s JFE Holdings, makers of value-added and speciality steel products, signed the first agreement to supply coking coal for three months at $200 a tonne, a 55 per cent increase over last year.
Iron ore is likely to move along similar lines owing to surging demand from China. Industry sources said BHP could push for selling 44 per cent of the ore it supplies on cash or index prices, which are pegged to spot prices.
In India, state-owned NMDC, the country’s largest ore producer that supplies mainly to producers without captive mines, has appointed consultants to rework its pricing strategy.
Sources said a range of options is being considered, from shorter supply pacts to benchmarking to spot prices.
“Weighted spot and long-term prices could be considered or it could also be linked to steel prices,” said NMDC sources.
So far, NMDC’s pricing for the domestic market was based on prices linked to Japan Steel Mills (JSM), which in turn was based on its contracts with Australian miners.
Steel makers say these changes in pricing dynamics will put the business cycle out of sync. Coking coal accounts for half a steel-maker's raw material cost and iron ore 35 per cent.
“The business cycle for a steel company, from the time it buys raw material to the time it sells the finished product, is seven to eight months. The industry will face dramatic change if raw material prices are going to move to a quarterly pricing system,” said Tata Metaliks Managing Director Harsh K Jha.
“Negotiations for annual benchmarking take about six months, so if the discussions now have to take place on a quarterly basis there will be chaos,” he added.
Tata Metaliks produces pig iron, an intermediate product of smelting iron ore with coke and a ferrous feedstock for steel.
Tata Steel’s Anglo-Dutch subsidiary Corus recently said it planned to sell more in short-term deals. The twin objectives were to manage costs better because the volatility in raw material prices had made it difficult to secure long-term contracts.
Sushil Maroo, director Jindal Steel & Power Ltd (JSPL), agreed. “It will become difficult for steel players to forecast prices for a long-term,” he said.
Resource majors can afford to make such a dramatic change in pricing policies because of the oligopolistic nature of the industry. Of the $200 billion iron ore industry, BHP Billiton, Rio Tinto and Brazil’s Vale control about two-third.
Coking coal is controlled by BHP, Rio, Anglo American and Xstrata.
Steel producers import almost 90 per cent of their coking coal, though iron ore is mostly sourced locally.
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