With several automakers recently announcing price increases to offset input costs, steel prices have come under the spotlight.
Steelmakers in turn have been impacted by surging global prices of iron ore, the main raw material, as demand from China has soared. And with Indian iron ore production having seen a dip in recent months, steel producers have been caught in a bind.
“China’s focussed fiscal stimulus for the construction sector has led to a sustained and strong uptick in steel demand there,” said Arnab Hazra, deputy secretary-general, Indian Steel Association (ISA). “Steel demand in China is expected to cross the 1 billion [tonnes] mark for the first time [in 2020].”
As a result, China’s demand for iron ore too went up. “India exported far more iron ore in the nine months ended December, compared to any entire fiscal year previously,” Mr. Hazra added.
Market intelligence firm SteelMint said on Friday that Indian iron ore exports had doubled to 40.7 million tonnes (mt) in 2020, from the previous year’s 19.1 mt. Of this, China alone accounted for 38.1 mt versus the 16.6 mt that it imported from India in 2019. Iron ore exports are attractive for Indian miners because global prices are now at about $170 a tonne. “Earlier, iron ore touching $100 was news. $165-170 is a once-in-a-lifetime price,” said a steel industry official, requesting anonymity.
Australia is a major trading partner for China but bilateral ties have run into rough weather after the former called for a probe into the origins of the COVID-19 pandemic. While Australian wines and coking coal have faced higher duties and customs delays, iron ore has so far been spared, as 60% of China’s requirements have traditionally come from the island nation.
After record iron ore exports in October, Australia saw its figures dip 2.2% month-on-month in November, ostensibly due to the cyclone season when Australian port activity tends to get affected.
“The global supply chain dynamics are being redefined by geopolitics,” said Srivats Ram. MD, Wheels India, which has seen a 20% increase in steel costs over the last 12 months. “[This] has affected the elasticity of response, especially at a time when there has been a severe contraction followed by a rapid increase in demand, with container availability and ramping up issues further congesting trade. Sudden changes in demand occurring at the same time have caused some disruptions in the demand-supply equilibrium globally,” he added.
The other factor influencing iron ore supply and prices in India is a decline in production, especially at mines in Odisha.
The ISA wrote to the Prime Minister’s Office (PMO) last month flagged a dip in domestic iron ore production as a key factor that had left its members with little option but to raise steel prices. Iron ore output fell 30% from the year-earlier period to 92.1 mt in April-October 2020, it pointed out. The ISA also urged a temporary ban on iron ore exports and cited the iron ore shortage and frequent increases in domestic iron ore prices by state-run NMDC as particularly impacting smaller steel producers – which account for about 40% of India’s 140 mt steel capacity.
In a separate letter to the PMO, the Federation of Indian Mineral Industries (FIMI) contended that the ISA was ‘obfuscating the issue’ and defended the iron ore sector’s actions. Local steel prices had risen ‘an unprecedented’ six times in November and December, FIMI said, arguing that it wasn’t necessary for the steel industry to raise local prices in line with international rates. It also said the country earned foreign exchange via iron ore exports.
FIMI also said that of the 33.4 mt of iron ore exported between April and October, 22 mt were of a grade that the local steel industry did not require as input material. It also pointed out that some steelmakers had been awarded iron ore mining leases but that their output had been far lower than targeted.
In February-March of 2020, 19 mines in Odisha whose leases had expired came up for auction. No sooner were the auctions completed, the COVID-19 lockdowns kicked in. It takes time for a new lease holder to start and ramp up production. Also, the previous leaseholders were allowed time to evacuate the remaining inventory from the mines. “Add to all this the disruptions that a rainy season and poor logistics bring in, iron ore production was naturally hampered,” Mr. Hazra of ISA said. Only 4-6 mines of those auctioned had started active production, he added.
A senior executive in a major steelmaker, requesting anonymity, countered FIMI’s claim, saying: “While using the time allowed for six months to evacuate their inventory, the previous leaseholders of mines in Odisha ended up blocking ports, railway sidings, road networks and railway lines for iron ore which they had earmarked for export. They did not have to pay any premium to the government compared to huge premiums the new lessee has to pay. So the earlier leaseholders were willing to pay a far higher cost for logistics to clear inventories within the statutory limit. Even if new leaseholders wanted to evacuate their output from Odisha for domestic use during the period, they could not do so due to blocking of logistics by earlier leaseholders.”
Emphasising China’s role in soaking up global steel supplies, he said, “China’s steel consumption in 2020 was 72 mt higher at 980 mt, than in the previous year. Its own production was only 58 mt higher at 1,054 mt in the period. It had to import steel and iron ore.”
The executive at the steelmaker pointed out that smaller steel players had not yet recovered from COVID-19 related lockdowns, either due to severe losses, poor working capital availability or lack of local iron ore availability. This had led to a shortage of construction steel, which is made mostly by secondary steel players.
By mid-December, long product prices had risen 15% over June, Motilal Oswal Securities observed in a recent report. And ratings agency ICRA noted last week that realty developers may suffer a 5-6% hit on margins given rising steel prices.
On the impact of steel prices on automobile makers, the senior executive said that typically, the steel industry negotiates prices with auto clients once in 6 months. But due to the COVID-19 impact, prices remained unchanged for automakers between October 1, 2019, till the end of September 2020, he pointed out. Only for the six months beginning October 1, 2020, had rates gone up for supplies to automakers, based on the previous six months’ average which amounts to about ₹5,500 per tonne, according to him.
The steel industry official said he expects Chinese demand for steel will cool down. “We anticipate that by the middle of 2021” iron ore and steel prices will ease, the official added.