In an exclusive interview with CNBC-TV18, Mr J Mehra CEO of Essar Steel Holdings, speaks about iron ore prices and assesses the impact of iron ore price rise on steel production.
Here is a verbatim transcript of the exclusive interview:
Q - How are you looking at the iron ore prices? I guess NMDC would have already contacted to you about their intention of raising prices, how much do you think this will tell on your margins and how much will you pass on in terms of higher steel prices in the coming quarter?
A - They have already increased the prices in the first quarter starting January and there is the trend of increase in prices all over. There are different kind of talks been done on this. While in the past we had had a stable price per year on regular supplies and on long term buying, whereas we are given to understand that the world over they are now trying to talk about more on spot or at best on a monthly or a quarterly pricing.
So as of now the picture is not clear, but there certainly will be an increase which is anticipated which will be substantial. If we look at what happened in 2009, there was a drop in the pricing over 2008. Now, the production is catching up in steel and in 2010 world over it is likely to be at the level of 2008, whereas the oxide supply side has not been able to match up with the increased demand which is likely to come up in 2010. So therefore, there would be pressure on pricing. How much could it be? It could be back to 2008 levels.
Q - What NMDC Chairman himself said when ambushed by journalist was that on January 1st 2010, he had raised prices by about INR 270 across all grades and that worked to about 6% to 15%, but what he is now suggesting is a 40% to 50% rise in long term contractual prices. He says he is in negotiations with his buyers to be able to get across that 40% by April 1st 2010, if that indeed where to happen what does that do to prices at your end both margins and how much you can pass on?
A - Normally in our contracts we follow whatever is the price percentage increase which occurs within NMDC and its long-term contract with Japanese, that is an increase which is passed on to us. Now, that hasn’t as yet been settled. So until that we cannot talk about what would be the increase like. So whatever the increase percentage a part of it has already been increased by 16% on January 1st 2010, starting April because our contracts start pricing on from April onwards that will be an additional increase which will come.
Now, the impact of this will be as I anticipate now, there will be a substantial cost push of steel making, not merely on iron ore, but there is also a supply side constraint on coal where the prices are moving up that is the energy side of it. So I would reckon that anywhere over USD 120 to USD 150 per tonne will be the impact on the cost of steel if the prices as are been talk about of 30% to 40% increase in iron ore and around 30% increase in the coal prices it would be to that level.
Q - How much of your contracts of iron ore are on spot and how much are on long term contract basis?
A - The NMDC contract, which is our base line till now, is on a long term contract which is on a quantity. The prices are based fixed on yearly prices as increase or decrease that occurs between the supplies of NMDC to Japanese or on international pricing that is our long term contract. I would say bulk of our supply line is on the long term.
Q - So when is this long term contract expiring for this year?
A - It is a long-term contract which is for a period of over 30 years. Prices are agreed and mutually settled at the beginning of every year based on increase or decrease that occurs in the international prices on our base price.
Q - To cover a 40% rise in ore and 30% rise in coke how much in percentage terms should steel prices rise? Somebody told us that that would be as low as 15%, is that a fair estimate is that a fair estimate?
A - No, it's much more if you take the price, iron ore alone constitute close to 48% to 50% in the cost of steel production and energy cost accounts 20% to 25%.
Q - If you are saying for this long term contracts prices are negotiated at the beginning of every year and at the beginning of this year there was quite a bit of hike, even if the spot rates are now increased by 30% to 40% as is being talked about even in that case, that should not impact your cost too much purely on account of iron ore?
A - No, it will impact because what has increased is around 16%, if the iron ore prices increase by around 30% then there is further increase of about 14% to 15%.
Q - I take that USD 150 per tonne as a potential increase say from April 1, from the next quarter what will that mean in rupees in domestic market, what will all you steel producers be announcing?
A - That 2008 is what will be for 2010 in terms of the cost push. Last time in 2008 the prices hit about USD 1,100, so I am not expecting that if you go to USD 1,100 but there will be substantial increase in the price. If the cost alone is around USD 150, then that at least will have to be added to this because there is not way that you can really absorb this cost.
(Sourced from CNBC TV18)
