WSD Strategic Insights LIV: Lower raw material cost, the great equalizer

Thursday, 18 June 2015 02:11:57 (GMT+3)   |   San Diego
       

Reduced raw material prices rearrange the steel industry’s economics

In the accompanying graphic, we observe since November 2011 that the raw material cost for WSD’s monthly World Cost Curve data for the average steel mill producing hot-rolled band has fallen about $285 per tonne to $250 per tonne.  Also, the cost curve has flattened considerably, which is a factor adding to price competition.

The spread in cost between the steel mills at the 12.5 percentile and 87.5 percentile position on the curve declined to about $103 per ton in April 2015 from $210 per ton in November 2011.  Of course, besides raw material prices, currency swings, changes in individual country inflation rates and cost cutting measures have had an impact.

Indian steelmakers’ “economic rent” diminished

India is an example of a country in which the mills have lost some of their competitive advantage in the past few years.  In 2011, iron ore production in India was unbridled, the domestic iron ore price was low and Indian steelmakers enjoyed a huge cost advantage.  Since then, three important developments have occurred:  First, the country’s Supreme Court has ordered that illegal mining be stopped, which has sharply curtailed iron ore output in the country.  Second, India’s policymakers have raised royalties and taxes on iron ore mining.  Third, 80% government-owned NMDC (National Minerals and Development Corporation) is seeking to obtain a high price on its sales to domestic steel makers. It wants its price to include the 2.5% duty paid on imported ore and the cost to bring in iron ore from offshore sources – with the reasoning for this strategy apparently being that, since it’s partially publicly owned, it needs to maximize its profits.  Also, NMDC and SAIL are jointly planning to build a 6 million tonnes per year steel plant in Chhattigarsh (eastern India) where iron ore reserves are both plentiful and high grade.  

Of course, given that iron ore and coking coal prices are now much reduced globally, it becomes even more important for Indian integrated steelmakers to have access to cheap iron ore if they are to prosper. 

As Peter Marcus said in a speech at a Ministry of Steel Conference in Mumbai on April 16, 2015, the Indian government is practicing “reverse mercantilism” when it comes to its steel industry policy.  Besides seeking a high price for the iron ore, largely government-owned NMDC is going into competition with the companies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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