Local iron ore prices higher owing to supply constraints

In an interview to CNBC-TV18, Ankit Miglani, deputy MD of Uttam Galva said that weak demand situation from automobile sector, white goods and construction has severely affected steel prices.

"NMDC has cut off the prices by about 11 percent because they had increased prices to unrealistic high levels. This has led to a significant amount of import of iron ore and iron ore spirits which was not foreseen. In reality, the price of iron ore in India is unrealistically high," he further added.

Below is the verbatim transcript of the interview

Q: How are you accessing the Chinese situation at this point? You have a partner in ArcelorMittal. What are the feedbacks that you are getting in terms of a near-term rally in steel prices at the moment?

A: We think that the rally is for a short-term. It is a not a sustainable rally because the fundamentals are still weak. We understand that prices of iron ore in China have improved significantly over the past couple of weeks. But that is more sentiment-based than fundamental. The traders and mills are currently maintaining very low inventory levels. This is basically a restocking of inventory.

The yield situation will unfold only in a couple of months when the new government in China reveals what their plans are and what the intentions are. Effectively, the government has taken over today. So, we still don’t know what policies they have in mind. What kind of stimulus packages they intend to do and whether they intend to release any stimulus packages at all. We don’t see steel prices globally sustaining or improving.

Q: What about the situation in India itself and for people like you who value add? NMDC has dropped ore prices. Would you have at least one quarter of probably lower raw material prices compared to the previous quarter and probably slightly higher end product prices because of the landed prices being slightly higher?

A: The situation is a little more complex. NMDC has cut off the prices by about 11 percent because they had increased prices to unrealistic high levels. This has led to a significant amount of import of iron ore and iron ore spirits which was not foreseen. In reality, the price of iron ore in India is unrealistically high. That is because about 60 percent of land of mining is currently stocked.

So, supply is restricted and there is a lot of new capacity coming up which needs the material to stabilize. So, a lot of integrated players have resorted to importing iron ore. That is also a reason for iron ore prices to be relatively stable in a very short-term.

Q: On the demand side, how will the prices for end products pan out this quarter?

A: On demand side, we have seeing a very weak demand situation. You are aware of slowdown in the automobile sector, white goods have slowed down, construction is severely restrained. All this is affecting steel prices. We are not seeing a very strong demand situation. In addition to that, we are seeing cash crunches with our buyers. So, even though they might want the steel they are not in a position to buy the steel.

Q: What about on cost side? Coking coal prices have gone down. Do you see that benefiting margins in the second half or would you say that kind of cost benefit will not auger too well for margins, it would just be a marginal effect?

A: I don’t think there will be a margin effect because the drop in coal prices is corresponding to the drop in steel prices. Steel prices have also dropped significantly over the past couple of months. We were looking at a price of USD 650 for base trade hot coil months ago. We are now looking at realistic price of USD 550 on the CNF.

So, margins will not be significantly affected by drop in prices because steel prices have also corrected. Again, the end product is also weak. Also, we are not seeing certain capacities. For example, Essar Steel running at capacity. Now there is lot of capacity expected to come on line in the next six months like Essar Steel, Tata Steel, Bhushan Steel. I believe there is some improvement in capacity utilisation in SAIL as well. That is not good for the demand-supply equilibrium.