SAIL of India Facing Tough Domestic Competition from China and the Ukraine

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It is interesting how the dynamics of a protected market differ from those of an open market. State owned Steel Authority of India (SAIL), the country’s largest steel producer, is predicting rising steel prices in its domestic market from January 2010 largely on the basis that iron ore and coking coal costs have continued to rise. Ask a US steel producer if all they need is rising raw material costs to ensure their sales prices increase and they would laugh in your face. Steel prices here are based on what the market will bear, not because of any drop in raw material costs but simply because of market demand. But in India imported steel is in large part controlled through tariffs and as world prices have fallen, SAIL has asked the Finance Ministry to impose a 10% duty on Chinese and Ukrainian steel to allow them to maintain their profits in the domestic market. So far the ministry has resisted but they will probably give in, as they did earlier this year with duties on certain other Chinese steel products.

Driven by demand from China, prices for iron ore have gone up sharply over the past two months to $106 per ton from almost $81-$82 per ton just a few months ago. Coking coal prices have also gone up to $165-$170 per ton from $128 per ton. By playing hardball with the iron ore producers and not coming to an agreement, China’s negotiating position has steadily deteriorated as the spot price has risen. Meanwhile inventories of iron ore from all of China’s principal suppliers are reported to have increased in China’s major ports by 830,000 tons to a current 66.75 million tons, suggesting either Chinese importers were stocking up when prices were lower, or demand is slackening and the inventories are not being drawn down as quickly as they were.

Nevertheless SAIL is looking at these rising costs and saying steel mills must put up prices but the reality is even China’s sales prices are falling as excess capacity is struggling to find a home. Chinese and Ukrainian steel is being offered at $400 per ton into the Indian market when the domestic (and indeed world) price is more like $500-550 per ton. It’s hard to see how such levels from China and the Ukraine can truly reflect the cost of production plus transport and finance.

Whatever one may say of SAIL’s argument for higher domestic prices they are probably right in saying steel prices will rise next year. Analysts are predicting 10-20% increases, whether that proves right remains to be seen but recovery is gathering pace in North America and Europe will probably not be far behind. Mill capacity levels are creeping up although still a long way off the summer of 2008. As some western mills move to permanently close capacity that had been temporarily idled earlier this year, utilization rates will rise laying the ground for price rises in the event of supply chain re-stocking taking off. For the time being though SAIL will no doubt continue to push for import duties and Indian steel consuming industries will continue to struggle in export markets against competitors in lower cost locations.

–Stuart Burns

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