NMDC arrives at new pricing formula

To be linked to Japanese Steel Mills price; steel makers fear price volatility.

Long-term prices with Japanese Steel Mills (JSM), with weighted spot prices and quarterly variations, is likely to be the basis of the new pricing formula of the state-owned mining giant, NMDC.

CRU, the London-based analyst and business consultancy group focused on mining and metals, is expected to give its report on the new formula by the end of the week. The report would be placed before the board later this month, said NMDC sources.

NMDC’s new formula would have major impact on domestic steel majors as it supplies ore to most domestic primary steel producers — like JSW Steel, Essar Steel, Ispat Industries and Rashtriya Ispat Nigam Ltd —that do not have captive mines.

The consultants were appointed about three months ago and considered a range of options, such as shorter supply pacts, benchmarking to spot prices, and linking to steel prices. However, sources said, the consultants felt the long-term JSM pricing was the most fair.

Globally, resource majors are moving to quarterly pricing. JSM have reached a deal with Vale of Brazil for April-June at $106 a tonne, an increase of 92 per cent. The move marked the end of the 40-year system of annual benchmarking.

NMDC sources said the miner would also bring in quarterly variations. The existing formula was being used since 2006-07 and was based on the Ganesan committee’s recommendations. The prices are calculated taking into consideration the percentage increase or decrease in international prices accepted by Japan for NMDC’s products and exchange variation on six-monthly forward rates on a yearly basis.

Steel makers fear the move would bring more volatility in domestic prices.

NMDC recently announced a provisional hike of 34-56 per cent in base prices. The increase was effective April 1. The move follows a 16 per cent increase in prices in January.

NMDC sources said the recent increase was just provisional. Final rates would be decided later and include price adjustment.

The final rates were likely to be based on the the new formula. The difference in provisional and final rates would have to be paid retrospectively from April 1.