WITH LONG-TERM CONTRACT PRICES FOR IRON ore for 2010-11 due to come up for annual review on April 1, the coming fortnight may prove difficult for both steelmakers and miners, globally. Domestic steel majors too are bracing up to face uncertain times ahead.
A high degree of volatility in ore prices in the past 1-2 years has forced large international miners and steel industry players to search for ways to devise a formula that will make prices more realistic and market-linked. While the existing system relies on fixed rates for long term contracts, internationally, there is a growing feeling among miners that a new price index should also include a spot price component. A review of the price formula became all the more necessary as recession deepened last year and spot prices tumbled well below the agreed benchmark prices set ahead of the crisis. A number of Chinese mills are believed to have reneged on the contracts at that time, refusing to accept shipments and instead buying far more cheaply in the spot market.
If indications are anything to go by, ore prices are slated to surge by almost 40-50% in 2010-11, reflecting a steep upturn in the fortunes of the global steel industry that was battling a severe recession just a year ago. If big mining companies like Vale of Brazil or the Anglo Australian Rio Tinto and BHP Billiton get their way, ore prices could be settled $90 a tonne or above, the record level at which the 2008-09 annual contracts were settled. This is sharply higher than the $60 agreed for 2009-10. Against this, the spot market prices for iron ore are
now close to $115 per tonne.
Back home, domestic prices too are up for annual review on April 1. India’s largest miner of iron ore, NMDC, currently fixes iron ore prices for long-term contracts based on the rate fixed by the Japanese Steel Mills (JSM), adjusted for the exchange rate. The Japanese who have virtually no ore reserves of their own have traditionaly been large buyers and thus taken the lead in price negotiations with global miners. However, in the last few years, with the onslaught of the Chinese steelmakers — who now produce over 500 million tonne or half of world’s steel output and buy huge quantities of ore from the market — the wisdom of setting JSM as benchmark price needs to be seriously examined.
Domestic steel majors such as Essar Steel, JSW Steel, Ispat Industries, RINL and host of others depend on NMDC for ore supplies. These are uncertain times for them and they could be staring at a similar quantum of increase in ore prices. With NMDC reducing its export commitments over the years, the combined offtake of domestic steelmakers now account for almost 85% of the company’s total production of 28.6 million tonne. Like its bigger international rivals, NMDC too, is planning to review its pricing formula and has appointed an independent UK-based metals and mining consultant, CRU, for the job. The state-owned company, in which the government is divesting 8.38% stake through a follow-on public offer, hopes to incorporate a mechanism to capture the business cycle of the domestic steel industry and make prices more relevant. If CRU’s recommendations get approved, NMDC may usher in a new price formula for its customers from April this year.
There is, perhaps, a strong case for delinking domestic prices from international trends. Among the options, could be the choice to stay with the existing formula, introduce a monthly or quarterly review option, indexation, or having certain spot and longterm price agreements. With NMDC’s production slated to go up to 50 million tonne by 2014-15, prices should also reflect the higher supply scenario instead of just mirroring the global situation.
While it is imperative to arrive at a suitable price formula that suits both domestic steelmakers and miners based on global pricing norms, it is equally important to minimise uncertainties in key raw material prices like iron ore and coal to get a better grip on cost of production.