The raw material scenario for the second quarter of 2012 is difficult to predict. Demand and supply of iron ore would continue to be dependent on the fluctuating trend of steel demand and not on the various indices made popular by analysts. The projection of steel consumption by WSA has estimated that consumption in the current year would come down to only 3.6%, lower by 2% of the last year before limping back to 4.5% in 2013.
Steel consumption would be led by China, India, Russia, Turkey and USA. All these countries except Russia and India are large importers of iron ore and their level of steel consumption would sustain the demand for ore.
In other words, if Chinese imports come down sharply from the last year?s level of 686 million tonne (59% of the total seaborne trade), demand for iron ore is likely to dip with implication on prices.
Recent reports indicate that China is increasing domestic production of crude iron ore from a level of 1,326 million tonne to possibly at 1,450 million tonne.
With adequate beneficiation facilities available in China, it is possible to utilise low grade ore (< 30% fe) for steel making. However, the marginal cost of iron ore available from plants being high (around $135/tonne), Chinese plants must be prepared to offer more than $135/tonne to get iron ore from indigenous sources. This implies that if the current cfr prices of imported ore drops lower than this level, China has to meet its iron ore requirements more from Imports. Thus global price of iron ore may be lower than the current price of $148/tonne by $10/tonne assuming a further subdued state of steel demand in the major steel producing countries.
There is a perceptible trend of restricting production of iron ore by the major three suppliers.
Fresh investment in Pilbara region of Australia for exploring new mining sources is taking time. Prolonged Euro crisis with more countries like Spain, UK and Italy facing the debt problems shaking the fundamentals of their economies, slower recovery in US and lingering political crisis in West Asia have all made the commodity suppliers extremely cautious to regulate supplies matching with effective demand only and shelve capacity expansion. This may turn to be a temporary phenomenon, but sounds good for the steel producers who are not able to pass on the rise in raw material costs to the customers and have sacrificed margin in order to maintain volume.
Latest price hike of lump ore by NMDC by 10% would add to the cost of steel production. The balance sheets in the first quarter of 2012 of the steel majors must reflect a better picture compared to the previous quarter to take forward the growth story of investment. The availability and prices of iron ore must lend a helping hand to their endeavour.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal