Rising iron ore prices to hurt steel industry; but these 3 factors may bode well for sector

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Published: January 5, 2018 11:33:06 AM

While the rising iron ore prices may put the sector under pressure there are a few factors which bode well for the sector going forward. We take a look at three such factors.

Rising iron ore prices is seen to hurt both large steel majors who do not own captive iron ore mines as well as smaller and medium steel firms that rely on merchant ore supplies to feed their units. (Image: Reuters)

The domestic steel companies will come under pressure after the hike in iron ore prices which will raise the production costs. The move is seen to hurt both large steel majors who do not own captive iron ore mines as well as smaller and medium steel firms that rely on merchant ore supplies to feed their units. “Recent increase in iron-ore price by state owned #NMDC & Orissa pvt. miners is forcing steel companies to pass on increased cost of production. Increased cost of other raw materials like coal, refractory, electrodes is further fueling this & leaving no other option@SteelMinIndia,” JSW Group chairman & MD Sajjan Jindal tweeted earlier this week.

While the rising iron ore prices may put the sector under pressure there are a few factors which bode well for the sector going forward. We take a look at three such factors.

Strong Asian steel prices

In its latest research report on global research firm CLSA observes that Asian steel spreads are near three year-high levels of $ 270 per tonne versus the long-term average of $ 205 tonne. “ We are optimistic on the outlook for China’s steel industry. We expect demand-supply will tighten on the back of winter curtailments and Chinese exports to fall a further 20% YoY in calendar year 2018,” the firm observed in its report. Notably, steel started on a soft note in 2017 as Asian prices fell 17% over Jan-Apr. This, however, was followed by a sharp 35% rally over April-September and prices largely held up since then.

Anti-dumping duties provide floor to Indian prices

The government’s move of keeping anti-dumping duties on flat-steel products till August 2021 is seen to bode well for the sector. “This provides a floor to Indian steel prices in case global steel prices drop sharply, improving margin visibility and reducing domestic steel companies’ earnings volatility. We also see some potential for industry consolidation, given that around 15% of Indian steel capacity is currently under distressed sale,” CLSA observed in its report.

India as a net importer by FY-20

CLSA expects India’s net steel imports to rise sharply from FY20 and climb to around 7% of consumption by FY21. “We expect Indian steel demand-supply to tighten sharply in the coming years, led by slowing supply growth and some demand improvement. We expect India’s net steel imports to rise sharply from FY20 and climb to around 7% of consumption by FY21. This should improve Indian steelmakers’ pricing power and could push up domestic steel prices to a big premium over imports,” the firm said in its report.

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