Volatility thy name is steel, an epithet aptly suited to describe events in the global steel market. After clocking a negative growth in production in 2009, the positive demand from auto, shipbuilding, construction and oil and gas has resulted in lighting of a number of closed blast furnaces and capacity augmentation by steel producers. The capacity utilisation rate of 79% is increasing for the last few months. As per the World Steel Association, 255 mt of fresh capacity would be added during 2010-12, with Asia contributing 68%. A consistent growth in demand is great for the steel industry.

Amidst such a bright scenario, the anticipated rise in raw material prices has added an entirely volatile dimension to steel prices from April onwards. The three major suppliers of iron ore, Vale of Brazil, BHP Billiton and Rio Tinto of Australia, are seeking not less than 90-100% rise in prices for fresh contracts. Vale has entered into a quarterly contract with JFE of Japan for $100-110 fob/t. The existing price is $0.97 per dry metric tonne per unit for fines and $1.12 per dmtu for lumps with 63.5% Fe. This has set a benchmark for the fresh contractual price of iron ore by BHP and Rio Tinto with China.

Quarterly contract in place of annual contract in iron ore and coking coal is a new phenomenon. This only strengthens the fact that the price trend for major raw materials would be difficult to predict. The situation is compounded by spot prices of iron ore of Indian origin (63.5% Fe) reaching $156-159 cfr/t in China. The spot price index can be taken as another parameter for fixation of prices. The ocean freight rates are also on the rise and Brazil can play around while fixing the fob price. We may see a spate of quarterly contracts being signed between suppliers and producers. The coking coal contract for the first quarter has been signed at a negotiated price of $200 fob/t which is nearly 55% more than the $129 fob/t signed earlier.

Would it lead to quarterly price revisions for steel? There are, however, a number of factors other than raw material prices that have a bearing on steel prices. These relate to sudden surge in demand, supply bottlenecks, rise in freight, duties and levies, scrap prices etc. For most consumers, quarterly price revision is better than monthly rates. The preferred mode for all project-executing agencies is, however, annual contracts for steel, which would enable them to assess project costs correctly. The inherent advantages of quarterly contracts in raw material supply are many. First, it would make steel producers doubly cautious in use of raw materials and economise on per tonne use of coal by improving the coke rate. It would expedite use of technology like coal dust injection. Second, if steel demand remains weak, the producer may not be able to pass on the full extent of the rise in raw material prices to the customer. Third, the quarterly revision in raw material prices is likely to lead to more efforts by steel producers in setting up of beneficiation facilities, acquisition and exploration of fresh mines in the domestic market and abroad and use of alternative technologies like Finex and Hismelt that require non-coking coal and iron ore fines.

The author is DG, Institute of Steel Development and Growth