More Iron from India May not Relieve Steelmakers’ Pain

By Michelle Smith – Exclusive to Iron Investing News

Steelmakers are feeling the effects of elevated costs for essential raw goods. A star on the list of pricey input materials is iron ore. Some companies have fared better than others at eating these costs but few, if any, have been able to ignore them.

US Steel Corp. (NYSE:X), the king of US steel production, reported losses again, making this their ninth  quarter in the red. The company listed the costs of iron ore as one of the primary reasons. AK Steel (NYSE:AKS) reported profits this quarter, but not without Albert Ferrara, Senior Vice President of Finance and Chief Financial Officer, noting that yield performances helped to offset elevated costs, including high iron prices.

China is the world’s largest steel producer; it also consumes the majority of globally produced iron. Xu Lejiang, Chairman of Baosteel, one of the nation’s largest steel manufacturers, said iron ore prices are not sustainable and the costs are putting Chinese steelmakers under pressure.

Chinese demand is believed to be one of the main reasons for the high prices. Despite their appetites for iron, however, Chinese consumers have little power to negotiate. At one time the mineral was sold through individual annual contracts between a producer and a steelmaker. Under a new pricing scheme iron, ore is now sold mostly at spot prices.

Anticipation about Karnataka Supplies

A quarter of the iron ore exports from India, the world’s third largest iron producer, have been frozen since July 2010 due to an export ban in Karnataka. This reduction in supply is also believed to have   affected prices. There are some expectations that removal of the ban will relieve some of the pressure on the market.

R.K. Sharma, Secretary-General of the Federation of Indian Mineral Industries said the decision would help soften the price of the raw material.

It appeared that steelmakers were going to have an opportunity to find out if Karnataka supplies would indeed ease their pain. A legal battle against the ban led to a temporary order from the Supreme Court, earlier this month, which required shipments be allowed to resume beginning April 20.

The temporary order may have been a victory in principal but it was certainly not a victory in practice. April 20 has come and gone and the Department of Mines has not issued the transport permits needed to move the minerals to the ports for shipment. A final decision in the case is expected in May and exports may be stalled until then.

Lifting the ban will allow Sesa Goa (BOM:500295), India’s largest private iron ore producer, to reenter the international market. But more iron from India may just mean more supply and bitter disappointment for those steelmakers who are looking for savings.

Supplies have already been on the rise over of the past year, with the major mining companies producing as much as they can. Yet, prices have also been on the rise.

Furthermore, Sesa Goa’s Managing Director, Prasun Mukherjee, has already said that iron ore prices are expected to remain firm due to steady demand for steel globally.

If that’s true, steelmakers best follow in the footsteps of AK Steel and find ways to offset their input costs.