The recent increase in prices of iron ore and coking coal has made steel manufacturing costlier by at least Rs 8,000 a tonne for producers without captive mines.
This is likely to put pressure on their margins, being unable to pass on the extra cost to consumers in a market situation where domestic demand is subdued.
Of the 122 million tonnes installed capacity of steel in the country, about 70 per cent come from industries without captive mines, dependent on iron ore bought from merchant miners.
The price of iron ore lumps (62.5 per cent iron) has gone up from Rs 1,744 a tonne in September 2016 to Rs 3,000 a tonne this month, a rise of 72 per cent. The FOB price of coking coal has doubled in two weeks this month, from $150 a tonne to $300 a tonne. Its September 2016 price was $220 a tonne.
The spiralling ore price has had an impact of Rs 2,000 a tonne of steel for those buying it from the market. The rise in coking coal price has pushed up the input cost by Rs 6,000 a tonne.
Interestingly, the domestic ore price is showing a rising trend while the international price has fallen by 20 per cent in the past two months, from $93.75 a tonne in February to $74.65 a tonne in April. “The cause of this pricing anomaly is the lack of a mechanism to ensure long-term linkage facilities for domestic steel industries, encompassing the merchant miners at a price derived for dedicated e-auction of ore sector-wise, as is the case with fuel supply auctions for coal,” said a steel producer whose plant needs ore from the market.
Citing the example of Odisha, which supplies about 60 per cent of the ore requirement of steel plants in the country, he said in the e-auction of iron ore by the state's Odisha Mining Corporation, the floor price is fixed at the same level as the sale price of the earlier auction. As a result, irrespective of the global trend, the auction price keeps increasing, later referred to by merchant miners to benchmark their ore rate.
Following complaints from steel plants, the Union steel ministry has set up a committee under the guidance of Niti Aayog to derive a pricing mechanism for ore in the country. Its report is awaited. Pending the proposed pricing mechanism, steel industries want the ore produced by merchant miners to be sold through open market auction, to ensure a market-driven price and discouragement of ore export. Beside raw material security by earmarking sufficient ore blocks for captive use in the mine auction process.
They complaint the Odisha government has put for auction only two ore blocks in FY18, one for iron and steel plants and another for merchant mining.