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Essar Steel sees substantial increase in steel price ahead
In an exclusive interview with CNBC-TV18, J Mehra, Essar Steel Holdings, speaks about iron ore prices and assesses the impact of iron ore price rise on steel production.
In an exclusive interview with CNBC-TV18, J Mehra, Essar Steel Holdings , speaks about iron ore prices and assesses the impact of iron ore price rise on steel production.
Here is a verbatim transcript of the exclusive interview with J Mehra on CNBC-TV18. Also watch the accompanying video.
Q: How are you looking at the iron ore prices? I guess NMDC would have already contacted to you about their intention of raising prices, how much do you think this will tell on your margins and how much will you pass on in terms of higher steel prices in the coming quarter?
A: They have already increased the prices in the first quarter starting January and there is the trend of increase in prices all over. There are different kind of talks been done on this. While in the past we had had a stable price per year on regular supplies and on long-term buying, whereas we are given to understand that the world over they are now trying to talk about more on spot or at best on a monthly or a quarterly pricing.
So as of now the picture is not clear, but there certainly will be an increase which is anticipated which will be substantial. If we look at what happened in 2009, there was a drop in the pricing over 2008. Now, the production is catching up in steel and in 2010 world over it is likely to be at the level of 2008, whereas the oxide supply side has not been able to match up with the increased demand which is likely to come up in 2010. So therefore, there would be pressure on pricing. How much could it be? It could be back to 2008 levels.
Q: What NMDC Chairman himself said when ambushed by journalist was that on January 1, he had raised prices by about Rs 270 across all grades and that worked to about 6-15%, but what he is now suggesting is a 40-50% rise in long-term contractual prices. He says he is in negotiations with his buyers to be able to get across that 40% by April 1, if that indeed where to happen what does that do to prices at your end both margins and how much you can pass on?
A: Normally in our contracts we follow whatever is the price percentage increase which occurs within NMDC and its long-term contract with Japanese, that is an increase which is passed on to us. Now, that hasn't as yet been settled. So until that we cannot talk about what would be the increase like. So whatever the increase percentage a part of it has already been increased by 16% on January 1, starting April because our contracts start pricing on from April onwards that will be an additional increase which will come.
Now, the impact of this will be as I anticipate now, there will be a substantial cost push of steel making, not merely on iron ore, but there is also a supply side constraint on coal where the prices are moving up that is the energy side of it . So I would reckon that anywhere over USD 120-150 per tonne will be the impact on the cost of steel if the prices as are been talk about of 30-40% increase in iron ore and around 30% increase in the coal prices it would be to that level.
Q: How much of your contracts of iron ore are on spot and how much are on long-term contract basis?
A: The NMDC contract, which is our base line till now, is on a long-term contract which is on a quantity. The prices are based fixed on yearly prices as increase or decrease that occurs between the supplies of NMDC to Japanese or on international pricing that is our long-term contract. I would say bulk of our supply line is on the long-term.
In an exclusive interview with CNBC-TV18, J Mehra, 
