India moves into the world of fluctuating iron ore and coking coal prices in tandem with the rest of the world from Thursday. Steel Authority of India Ltd (SAIL), the country?s largest steel company, became the first domestic producer to sign a quarterly contract, for coking coal. The new price system for iron ore and coke replaces the 40-year-old practice of annual contract prevalent in the sector and it has the potential to make the prices of these two key raw materials as volatile as crude oil. European steel companies, including ArcelorMittal, have filed anti-trust petitions with the European Commission to protest the huge price rise of over 80% in some cases.
While the size of quarterly contract at 1 million tonne is small considering that SAIL annually imports around 12-million tonne of coking coal, the price at which it is contracted?$200?is 55% hig-her than last year.
India?s largest mining company, National Mineral Development Corporation (NMDC), plans to hike the prices of iron ore by almost 70% from April 1 as it moves to a quarterly pricing regime for all long-term contracts. All big global iron ore producers like Vale of Brazil, BHP Billiton and Rio Tinto have made or said they will make the switchover soon.
A senior NMDC official, who didn?t wish to be identified, said, ?Usually, our iron ore export prices are linked with international markets and hence given that most other ore makers have hiked their prices, we, too, are hopeful that our export price for iron ore fines this year would be more than $100 per tonne in 2010-2011.?
Industry sources said this is exactly the sort of fluctuation in iron ore prices that will cascade on steel prices and so impact downstream sectors like automobiles. AS Firoz, chief economist, joint plant committee, said, ?It is a significant move as it could disturb the dynamics of downstream industries like automakers who rely on long-term steel contracts and also lead to more intense and continuous negotiations between iron ore miners and steel companies.?
Major integrated steel producers expect to raise the prices of base hot-rolled coils by around Rs 2,000 per tonne from April 1. In the last two months steel producers have hiked prices by around Rs 600 per tonne. While Tata Steel and SAIL have captive mines, other steel producers like JSW, Essar Steel and Ispat Industries buy iron ore from NMDC.
The global breakdown of the stable annual pricing system has been pushed for by the mining companies. But the world?s largest importer of iron ore, China, is opposing it now even though its disdain for annual contract last year has spurred it. According to Goldman Sachs, the change could lead to a combined $20-billion rise in annual sales revenue for Rio Tinto, BHP Bilition and fellow Australian producer Fortescue Metals.