The Hindu Business Line : JSW Steel worried over rising raw material costs

Mumbai, Feb. 4 Despite the recent price hike of 8-10 per cent, many steel-makers say the mismatch between raw material cost escalation and sale price still persists.

“Raw material cost has gone up by over 55 per cent, especially imported coking coal and iron ore. Except for the Tatas and SAIL, most companies depend on imports,” said a Mumbai-based steel company official.

Last week, major steel companies have raised prices between Rs 1,500 and Rs 2,500 a tonne.

Mr Sajjan Jindal, Vice-Chairman and Managing Director, JSW Steel, said: “The strong demand and soaring import costs led to a sharp rise recently in finished steel prices. The negotiations for revising long-term prices for iron and coal for 2008 signal that there will be a sharp rise in these prices too. With this backdrop, it is expected that new highs will be seen in steel prices in 2008.”

Iron ore

A 16 per cent rise in iron ore requirements for China in 2007 pushed spot f.o.b. (free on board) prices in excess of 125 per cent to about $150 a tonne in the fourth quarter of 2007, from $62 (Fe-63.5 per cent). For steel makers, buying ore at spot prices, the rise had pushed production cost up by over $100 per tonne.

This near tripled the price difference between spot and LTA (long term agreement) ore prices, making LTA price negotiation for 2008-09 speculative.

Coking Coal

Coking coal f.o.b. prices have gone up by 130 per cent from $98 to $225 a tonne, leading to a cost inflation of about $90 per tonne of steel. China became a net importer of coking coal in 2007, with imports of 2.5 million tonnes.

For the integrated steel producers dependent on import of coke, the cost-escalation has virtually gone through the roof with f.o.b. prices up from about $178 per tonne to $420.

Melting scrap

Melting scrap, a major raw material for mid-size plants operating on induction and electric arc furnaces, have risen by almost 27 per cent or $75-80 a tonne in the US in the last two months and over 45 per cent in the last 12-months. Import into Asia has also increased from about $410 to almost $500 per tonne.

Increase in freight cost too has adversely affected the bottom lines of steel makers dependant on imports.

Rating agency Fitch expects raw material prices to increase by 30-50 per cent in 2008.

Heavy reliance on imported coal by manufacturers using the blast furnace route would lead to exposure to the volatility in international prices, which Fitch expects to increase to $120 per tonne.

Fitch also anticipates freight rates to remain relatively high in the next 12-18 months.

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