Coal, iron ore will soften as steel melts 

AS FIROZ
Posted online: Monday, November 07, 2005 at 0046 hours IST

There is no doubt that the year 2005 will end with about 6% rise in crude steel output worldwide. Steel production will lose further pace in 2006 and will come to match the level of consumption growth, about 5%. This will reduce demand for raw materials - iron ore, coal, ferro-alloys, other ores, fluxing materials etc. The focus has so far been on the steel demand and supply scenario trying to predict pricing conditions in the months to come, the fall in production will dampen the business of the steel raw materials industry. As expected, each side is trying to project scenarios sharply in contrast with each other. For example, at a recently held conference in China, while the iron ore industry projected shortage conditions to prevail in the year to come, due to inability of the industry to meet incremental demand for the same from even the moderately growing steel output, steel-makers have made a strong case for lower iron ore prices on account of lower demand and rising supplies. While the debate on this subject may go on and on, what is certain is the fact that both the sides will get engaged in hard negotiations. The tasks for both the sides will be more difficult this time around, considering the fact that conditions in the steel market and its future remain somewhat uncertain. While the iron ore has a significant spot market, where prices can move up and down based on the conditions on weekly or fortnightly basis (or even daily), the business in coking coal is largely contract- based. Prices will be negotiated for the year and the same will be driven largely by steelmakers' ability to pay. Coking coal prices on the global contract market have risen from their pits along with steel prices. From about $45-48 per tonne three years ago, the contract export price of hard coking coal rose first to about $58-59 per tonne and then to $120-125 per tonne. The steel makers paid such a price because they were backed strongly by huge steel prices. Today, prices on the spot are not as good, and have fallen significantly from their peaks in contrast to conditions a year or so ago when the spot prices rose above $200 per tonne. The prices of coking coal have fallen substantially and are lying way below the contract price levels. Therefore, one would expect steel-makers to have the upper hand in negotiations and pull the contract prices down. But, the question that will have to be seen is whether there is enough coking coal to be delivered on contract basis round the world. Even if the reserves are high and production capacity adequate, the actual supply potential on delivery basis may not be enough to meet the assured demand. Therefore, the coal companies may still find their ground strong and bargain hard to retain current price levels and in return give steel-makers greater comforts of certainty. Over the years, consumption of coking coal per unit quantity of production of steel has fallen due to improved technological efficiency and use of alternatives like coal dust, tar injection etc in blast furnaces. At the same time, there is a lateral growth in steel production through the blast furnace route. Almost the entire new steel production in China has come up through this route. As a result, the share of the BF route in steel-making has gone up. In the last few years, whatever coking coal the steel industry as a whole has saved by bringing down the coke rate, much more than that has emerged as new demand from incremental steel production. How acute the shortage of coking coal globally has been can be gauged from the fact that a country like China, endowed with huge reserves of high quality coking coal and a massive coke making capacity, is importing coal from other countries to feed her own steel mills and the mills there are talking about an imminent shortage of the same! On the other hand, sentiments were overblown last year and steel price expectations were unduly exaggerated.

http://www.indiapress.org/gen/news.php/Indian_Express/400x60/0