Any further drop in global prices of iron ore, which is likely in May, the differential would go up.
It is good to see that market realities are dominating the pricing strategies in the domestic semi-oligopolistic iron ore segment. NMDC has reduced prices of fines by R500/t and lumps by R200/t for the balance 12 days of April ’15. At R3,050($49.1/t) the supply price for the lumps and at R1,960 for the fines, the domestic prices are comparable with global prices of $50/t for Platts index for 62.5% Fe CFR China. However, If royalty and the compensation to the DMF and railway freights are added, the final prices at the customers’ end would be higher than imported iron ore.
Any further drop in global prices of iron ore, which is likely in May, the differential would go up. Lowering of the global prices by another $10/t may still be sustainable by the four dominant players given the current cost of production. Indian steel manufacturers are deprived of freight parity as substantial drop in vessel hiring charges did not get reflected in domestic railway freight rates which with the latest changes in tariff classification in steel have only moved up for the last two months.
A fall of around $80/t in steel scrap prices in the recent period has made imported scrap (SMS:80/20 variety) available at $300-305/t in Mumbai. The drop in prices in scrap, while temporarily increasing demand, has made the producers wary of scrap recovery process and may lead to inventory accumulation of obsolete scrap.
Correspondingly sponge iron prices are ruling at average R16,000-17,500/t ( $255-280) range. The thermal coal (non-coking) prices are currently available at an average price $60/t fob Australia with coking coal spot prices are lower than $109/t fob contract prices of SAIL/RINL. However, more than the price, it is the limited availability of coal in the domestic market and the possibility of a hike in prices to make up the cost of auctioning when production begins at the completion of the process remains a worrying factor for the secondary sector before they obtain any reduction in the cost of steel production.
Another interesting feature of international steel trade is the variation of actual transaction prices as compared to the official quoted prices depending on the logistics, volume, period of contract, sizes and grades and highly volatile political scenario in specific zones.The official quoted prices for HR Coils by China at $413/t ex-Shanghai is offered at $380-390/t CFR Mumbai for actual transaction. For regular buyers it is available even at lower quotes.
Due to prolonged political crisis, Ukraine and Russia are offering HRC at around $365/t CFR Mumbai against officially quoted $375/t fob Black Sea. Assuming that the government hikes the customs duty rates by another 5-7%, domestic prices would still be higher.
The spread between HR and CR at $90-100/t and between CR and HDG at $60-70/t is not much different from the earlier trend. However, the spread between Billet and Slab in the global market has widened with slab prices regularly coming down reflecting a lower demand for flat products compared to long. The domestic market also exhibits a similar trend.
It is apparent that downward trend in raw material prices in the global market has not replicated itself in the domestic market. In each country particularly those dominant in the global market, the marginal cost of production has come down. It is reported by WSD that while the operating cost of HR in China is at $414/t, the marginal cost stays put at $368/t, a clear gap of $46/t (around R2,850/t).
In all these export-oriented countries, the export prices are very competitive and much lower compared to quoted prices from India. Indian prices, however, reflect the domestic cost of production which need to further come down in the coming days to give relief to the buyers of steel in the country.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.