NMDC has brought down the domestic prices of iron ore in recent months. Like in the global market the spread between EBITDA and marginal cost being significant for majority of ore producers, a further drop up to $10/t can still be sustained
Last week we discussed the implication of iron ore’s falling prices on global steel market and concluded that at current prices (<$55/t CFR China) most of the Chinese domestic production of ore concentrates would not be viable and therefore even at a lower production level of crude steel in 2015, China would continue to procure iron ore in international market and this factor alone can prevent any sharp decline in global prices of this commodity.
Last year China imported around 950 MT of iron ore and produced around 400 MT of ore. In first two months of 2015 the crude steel production in China has gone down by 1.5%. Current forecast has put Chinese production at 798 MT for 2015, around 25 MT lower than the previous year. Thus considering the above two factors there may not be any significant changes in Chinese demand for imported ore in 2015. Also the quasi-oligopolistic pricing by the three majors, as the report says, may not permit sudden drop in prices unless steel production from the rest of the world (excluding China) comes down significantly.
NMDC has brought down the domestic prices of iron ore in the country in recent months. Like in the global market the spread between EBITDA and marginal cost being significant for majority of ore producers, a further drop up to $10/t can still be sustained. These developments in the global market are to be monitored closely in setting domestic prices of the ore in the coming months.
Interestingly, in the first two months, crude steel production by India has exceeded that of the US and made India third in ranking of steel production. The current projection has put 87.5 MT of production of crude steel by the US in 2015 against 84 MT by India. But the projection for India appears to be on the lower side. There is another impetus for US domestic production to rise in the current year. A large part of steel demand in the US (approx 33%) is catered to by foreign suppliers as the average prices charged by US mills ($ 522/t for HRC ex-works as against Chinese prices of $370/t fob and CIS prices of $380/t black sea) are much higher than imported prices and over and above, US dollar is getting stronger against major currencies.
Rising auto sales in US market and thrust on infrastructure investment by the US government, steel demand in that country is likely to be better in the coming months. However, thanks to the persistent clamour and efforts by US steel producers fully backed up by eminent US senators, the rising imports from China and CIS have been taken care of by a spate of stiff anti-dumping and countervailing import duties and Suspension Agreement (with Russia).
India is also restrained by a set of trade measures against export to the US and in spite of WTO ruling that the US has violated the norms of trade measures in respect of some aspects of import of HRC from India, things have not improved. As a result, apart from South Korea, Japan and Turkey (in long products) the demand recovery in the US would not help any other steel exporters and would permit US steel producers to augment capacity utilisation from the current level of around 77% to a higher level. Demand growth in the US may be a precursor of return to normalcy in the global market subject to gradual and slow pace of restructuring in Chinese steel industry with emerging economies led by India making up the shortfall to the extent possible. This likely scenario may not remain a wishful thinking.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.