Raw material and finished goods — changing dynamics amid climate push

For any commodity it is universally true that raw material availability, its quality and price provide fundamental basis for the pricing of the finished products. Any risk associated with the input materials are perceived with utmost concern. In the recent past, both in the world market and inside the country, these types of events get major media publicity which in a way influence the marketing of the finished goods. It is fair to assume that supply scenario of the finished products also influences the demand and price of the raw materials and in a way, both are correlated.

Thus as the report on heavy rains and flood leading to the closure of the main rail link to Newcastle port and disruption of rail link to export terminals in South Africa have been made public, Indian buyers of thermal coal were looking for alternate sources of supply like Indonesia and coal prices started to move up. It is apparent that premium low vol coking coal HCC which sharply came down from $160.5/T FOB Australia in Jan’21 to $112/T in 4th week of March’21 may move further northward in the coming weeks.

The environmental push by the Chinese government in specific provinces (Tangshan etc.) may impose production ban on polluting industries and lead to supply constraints. However, as the overall demand scenario in China is good buoyed by stimulus measures and easing of the property market, the demand for merchant iron ore by China would continue unabated, thereby sustaining iron ore prices (current price CFR Chinese port $ 164.8/T) with marginal rise in H1 of 2021.

Current projections uniformly expect a contraction of demand and production in China in 2021. If this takes place, it would cause significant flutter in the trading price of iron ore.

Steel industry in China has performed well in the Covid-19 pandemic year with a 5.2% rise in production (@1053MT) in 2020 and a projected growth of 8% in steel consumption at 980.1 MT, according to WSA. In the first two months of 2021 the Chinese production (175MT) has grown by as high as 12.9% with a corresponding positive push to steel consumption.

Although production restriction on account of environmental reasons in the current year may lead to correction in provincial performance, degrowth in total production volume in 2021 which is predicted by most of the analysts may not come true. And therefore the estimates by WSA at keeping the consumption in 2021 at the same level in 2020 does not seem to be warranted as of now. The share of China in global steel consumption which started at 16.6% at the beginning of the century has already reached 54.6% share (India: 5.6%) in total consumption.

Another aspect arising out of this interdependence of raw materials and finished products, global and domestic, relates to the perception of the various players. For instance, when the global price of a commodity rises due to supply constraint or higher demand, the message to the producers of similar product in the domestic market is a positive signal towards raising the prices irrespective of the quantum. The oft-repeated import parity is a well established phenomenon that is called upon for justification. Needless to mention this is applicable to commodities that are regularly traded in the global market.

The other part is through direct import of the commodity which now becomes costlier to put pressure on the similar goods in the domestic market for price push. In the event of rise in global prices of specific commodities, there exists a sense of relative deprivation on the part of the domestic players, and this is most important, there is no demand shrinkage for the product.

Technology has a significant role to play in influencing the prices of raw materials and finished goods. It is anticipated that use of fossil fuel would undergo a paradigm shift in the coming decade.

Coal based power and steel, as it causes environmental problem, would be substituted by renewable energy and alternative routes for steel making like syn gas (coal syn gas, natural gas) and hydrogen based. The demand for metallurgical coal would be reduced over the years, while demand for non-coking coal for generation of syn gas for DRI and other downstream industries like Chemical and fertiliser would still be there.

Increasing use of scrap (incentivised by vehicle scrappage policy and setting up of scrap processing centres) by furnaces would enhance EAF capacities relatively more compared to BF-BOF process. A time is fast approaching when export products entering markets in EU and other regions would have to pass through rating benchmarked on CO2 emission levels.
(Views expressed are personal)

The author is Former DG,
Institute of Steel Development and Growth