Expect iron ore price to rise by Rs 500/tonne: Kalyani Steels

With the recent rally in domestic steel prices, RK Goyal, MD of Kalyani Steels says that he is hopeful that the minimum import price (MIP) will be extended to other engineered steel products.

In an interview with CNBC-TV18, he said that there is no big 'uptick' in steel demand and expects iron ore prices to go up by Rs 500 per tonne, which will be an added burden on the industry.

Reacting to this news, Chintan Mehta of Sunidhi Securities said that he expects domestic steel prices to remain stable till MIP exists.

He further recommended a buy rating on JSW Steel and Coal India with buy targets of Rs 1200 and Rs 380 respectively and has a neutral outlook on NMDC with a target of Rs 87.Below is the transcript of RK Goyal and Chintan Mehta’s interview with Nigel D’souza and Latha Venkatesh on CNBC-TV18. Latha: We spoke to the steel secretary and she was saying that she has been told that demand is likely to strengthen in the coming months and that steel prices have risen by about 13 percent in the past month. What is the situation on the ground for you? Has demand improved? Have you been able to price your products higher? Goyal: As far as we are concerned, we are manufacturing engineering steel long products, which are used basically, by auto industry, bearing industry, seamless tube industry, oil and gas. Now, there is no minimum import price (MIP) on our products and we are not able to increase any price. On the contrary, we are finding there is an increase in cost because of increasing prices of iron ore. Latha: Have you not been able to pass it on to your customers? Goyal: The impact of that is yet to come, because it has happened in the last few days and as of now, I do not see we will be able to pass it on to our customers. Nigel: So, have prices dropped considering that you do not attract MIP, the products that you make? And also, secondly, you had last time told us that you are hoping that maybe MIP will be extended to other products as well. Yesterday, the steel secretary told us very clearly that there are no such plans. Were you still hopeful? Goyal: We understand that it will be reviewed every couple of months. So, we are still hoping that when the next review takes place, our products will also be considered. Latha: Do the domestic e-auction or non-auction prices of iron ore move in tandem with global prices, given the subdued demand in the economy? Will they rise a little less than global prices? Goyal: Iron ore prices had come down in India also, but not to the extent that the global prices have come down. Now, last couple of days, there is an increase in global prices. And we are expecting a surge in iron ore prices in India. Nigel: There was an e-auction that takes place in Karnataka periodically. On March 4 last. What reports indicate is that from the base price, the actual bidded price was much higher. So, could you give us some details and did you participate in that particular e-auction that was held on March 4. Goyal: Yes, we did participate and we had to buy some material at a much higher price. It is basically in anticipation of some increase in base price by various miners including NMDC. We were expecting some more material to come for e-auction from NMDC which is not the come as of now. Nigel: Could you give us that price? What was the price that you paid for your iron ore supplies and also there are various reports that indicate that maybe prices could go up by around Rs 700-1,000. A few private miners have told me off the record that they have increased prices by around Rs 50-100 just in the last couple of days. Goyal: That is what we are also hearing. And that is what we are worried that they may increase the price, even though in the global market, it may be very temporary. And we do expect prices to go up something around Rs 500, but there is no support in the sense that manufacturing is not going up. So, to us it is not sustainable, however, people are trying to increase the price in the short-term. Latha: What is the demand scenario for your products? Is it very tepid? How will the demand situation compared to last quarter, or year ago quarter? Goyal: Demand is not growing. In fact whatever is the little growth, it is eaten away by cheap dumped material from China and dumping in our space is increasing continuously and they are enjoying their increased market share. Latha: What is your expectation? Was the rise in iron ore and global steel prices a flash in the pan? Do you see it receding? Mehta: Regarding iron ore, there are two phases to it. When we began in February, it was around USD 44 and quite movement was expected due to couple of reasons. China was resuming their market after Lunar Holidays, February, mostly the month of construction activity in China followed by a supply disruption in Australia at their ports. So, some kind of upper movement was expected in iron ore. No one can rule out that. And towards the end of February, we saw iron ore touching USD 52. But them Monday, surge of 20 percent was out of the blue and there is no fundamental reason to support those data because even the best case scenario for iron ore demand, if we assume, it is the overall steel production involved even increases by 2-3 odd percent, still there is an excess of 100 million odd tonnes for current year is concerned for iron ore. So, the case is not viable for this kind of upsurge. Nigel: What is your take about domestic prices? Do you expect it to sustain? We have seen a bit of an increase, the steel secretary confirmed that yesterday as well. Do you expect prices to sustain at this 10 percent increase we have seen in the last one month? And also, what would you play ferrous or non-ferrous? Mehta: I would like to break this again in to two parts. When we say the consumption as demand has increased, what really actually happened at the ground level is that the buyers or the traders of the consumers actually trying to get that stock available at the old prices. So, inventories which they were trying to delay it for a month or so, when you talk to ground players, the volumes on that front, whereas the new models which the new prices which the steel companies are quoting, around Rs 34-35 for hot-rolled coil (HRC), the traders and the consumers are asking for a discount of Rs 500-1,000. But nonetheless, the input is not at all feasible at these prices. So, the user industry has to go with this. And what we expect is that the real test would be seen in April and in May when those users industry will use the inventory and how we consume this newer products and new prices, that will be a thing to play. So, reduction in prices does not look a scenario, but increase of Rs 500-1,000 looks on the cards. Latha: Any buys in the steel and metal space? Any shares? Mehta: We will prefer JSW Steel on the whole ferrous space for the simple reasons they are the most vulnerable to where steel prices are concerned, they have reduced their exports, completely domestic focus. And the debt level is quite manageable for all the concerned peers compared to Tata Steel. So, JSW Steel remains a preferred stock.