Steel prices are falling. In certain markets in the world they are tumbling down. In India, as per several market reports, the prices have fallen in various measures.
There are obvious reasons for that. Industrial growth is slowing down. Construction has been hit by the credit crunch and loss of speculative demand for housing, higher costs of construction and the rise in the rates of home loans. In addition, there is the monsoon factor. Overall, one could not expect steel demand to grow strongly in these circumstances. Under these conditions and also considering the global trend, the steel prices could not have risen, despite the fact that some of the prices were maintained below the global level at the producers’ end for some time.
Therefore, there is no government action required on the steel market. There is no need for the government to ask steel makers to hold prices down. They have no options now and will do so irrespective of whether the government asks them to do so or not.
The very fact that the export prices of billets from the CIS have been quoted at only $950, down from $1,250 a few weeks ago, steel scrap prices have fallen to as low as $450 per tonne and the export price of iron ore fines being quoted only at $100 per tonne, FOB Indian ports, there are reasons for the government to relax a little, stay away from active interventions in the market and let the market correct itself to the overall global and domestic conditions.
The recessionary conditions will take the shine off from steel. It will, as has already been witnessed, bring down the prices of steel raw materials. Therefore, the steel industry or the government need not worry about the spot market prices of many of the major raw materials. It has never been experienced differently in the past.
It is only the annual contracts on coking coal which are matters of concern. The contracts were signed at huge levels corresponding to the record prices of steel prevailing at that time. The steel industry did not foresee the downturn that could cause a major problem for them such as the one they are faced with. They were more concerned about supply security and feared capacity underutilisation if they were not through with the contracts.
This experience is not something new when annual contracts are signed. The steel industry had record prices and most of the players, including the major Indian mills, had the huge benefit of getting coking coal at $95 per tonne or so, FOB Australia, when the spot prices of the same were over $350 and the steel prices, on an average were higher than $1,000 per tonne. In the case of iron ore too, the global contracts might not have been so well timed. They paid more for the same reasons.
The major mills in India were unaffected by it as they either had captively held resources or were fed by the government-owned NMDC, who despite their strong desire could not raise the iron ore tags because of the government’ concern about inflation. The smaller plants, mainly the sponge iron units, who bought iron ore lumps from the local market, paid in line with what they got for their output, that is sponge iron.
This market is regionally well spread out, driven by local conditions and more fundamentally shaped by the price the sponge iron will fetch from steel makers. There are sufficient competitive conditions here and the government need not bother much. Very short-term price imbalances need not attract government attention.
The author is independent strategy consultant, Steel and Natural Resources
