Steel cos in a dilemma over war between miners, steelmakers

The global war between miners and steelmakers, which pushed up coking coal prices by 52%, has put Indian steel companies in a dilemma. While steelmakers may not be able to raise prices due to resistance from users, such as car makers, the sector could instead explore options of production cuts to protect margins, said people connected with pricing strategies at steel firms. 

Recent negotiations, first by global mining major BHP Biliton and later by Anglo American and Rio Tinto, with Japanese steel mills, has led to a April price of $330 a tonne globally for coking coal. BHP, which controls 50% of the coal market worldwide, offered variable pricing options to push for a monthly contract in place of quarterly. To avoid the monthly pacts, the Japanese steel mills turned to Anglo and Rio and accepted higher prices, said one person familiar with the development. 

But this may not result in a steel price hike in India immediately. Slow demand from users such as auto, consumer goods and the building sectors, due to restricted availability of finance, could lead firms such as Tata Steel, SAIL, JSW Steel and Essar Steel to maintain current prices till April end, said the people cited earlier. 

Steel companies didn't comment on the issue. 

Prices of hot rolled coil steel are currently at 37,000 a tonne. The hike in coal prices would have led to an increase of about 5,000 a tonne, said a steel company executive who asked not to be named. But this would be resisted. Inflation in India, at close to 9%, is already very high and this could lead to higher interest rates and affect earnings growth. 

"Japanese steel mills accepted $335 a tonne for supplies starting in May. This has led to the sharp rise in Indian prices which use the JSM (Japanese steel mills) as a benchmark," said Vishal Agarwal, managing director of Visa Coal, a Kolkata-based coal trading company . 

Most Indian steel companies including Tata Steel and SAIL, which have their own iron ores, import coking coal. The current import price of coking coal is $330. This is much higher than the $225 per tonne contracted in the January-March period. 

The prices are linked to the tenures of the contracts. BHP, the largest among coal mining companies , has been at the forefront of the move to shift to monthly contracts. Last year, the Australian major led the drive to shift from a 40-year old tradition of annual contracts, toward a quarterly contract. To attract coal users, BHP last year offered lower rates for quarterly contracts and higher rates for annual pacts. The miner tried the same strategy this year to push for monthly agreements. 

Steelmakers are resisting monthly pacts as it would disrupt their production schedules. For mining companies, a monthly pact would imply better freedom on pricing. 

Since steel companies can't bear the burden of 5,000-a-tonne hike, the firms may look at production cuts to protect their margins, said one executive. 

A recent Stanchart Equity Research report said margins for steelmakers have fallen back to Q3 FY11 levels, impacted by lower prices, higher costs and new capacity addition. "Realisation has softened by 1,500-2,000 in the past month and are only slightly better than December 2010 levels," said the report. 

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