Sponge iron at rock bottom

Business Standard, May 27, 2008
Dilip Kumar Jha / Mumbai May 27, 2008, 3:03 IST

Despite buyers' apprehension on placing fresh orders ahead of the monsoon season, prices of sponge iron, an important raw material for steel manufacturing, is unlikely to decline from its current levels.

Sponge iron or direct reduced iron, being quoted at Rs 18,000 per tonne, have seen around 14 per cent fall in the last one month because of subdued raw material prices and market switching to need-based buying instead of creating inventory.

"An independent sponge iron producer cannot afford selling below current levels," said Amitabh Mudgal, general manager (marketing), Monnet Ispat, one of the largest sponge iron suppliers to steel producers.

At least, 1.5-2 tonnes each of iron ore and coal is required to produce one tonne of good quality sponge iron. Although, the price of iron ore has declined by 10-12 per cent in the last one month, price of coking coal is continuously moving upwards.

Iron ore fines are quoted in the range of $90-100 per tonne. Coking coal has perked up to $300 from $130 a tonne in the last three-four months, while coke has doubled to $600 a tonne since the beginning of the year.

At a minimum margin of 10-15 per cent, the current level is the cut-off price for an independent producer. Therefore, there is hardly any room for sponge iron prices to fall further, said Mudgal.

Sponge iron producers operate with a margin of 13-18 per cent, depending upon the cost of iron ore and coal supplies.

On monday, buyers book only to meet daily needs anticipating the price to decline. Those who are waiting fresh bottom level would be trapped, he added.

Placing multiple orders for future consumption is a common phenomenon for the sponge iron industry. But, because of a price decline in recent past, traders are abstaining from multiple orders. Therefore, the pipeline inventory has been disrupted abnormally.

India produces about 50 million tonnes of steel annually, while consumption stays around 51 million tonnes. He said domestic buyers remained untouched despite contracted value of iron ore between Indian exporters and Chinese importers going down from $175-180 a tonne last November to $140-145 now.

Chinese traders slowed down orders when prices start moving up. As a consequence, the pressure of stock clearance forced exporters to bring down prices. "Hence, the Chinese contracted price cannot be a correct indicator for real market sentiment," said Mudgal.

India produced 16.28 million tonnes of sponge iron in 2006-07, of which, 5.26 million tonnes was contributed by gas-based variety and 11.01 million tonnes by coal-based one

Telegraph (UK) on Russia's strategy on getting more revenue from crude oil price increases

Some excerpts:

Eighty cents on every dollar above $27 a barrel goes to the state. Energy rents fund 48pc of the budget.

...

The Oil Stabilization Fund was supposed to inoculate Russia against the curse by siphoning revenues out the domestic economy. Certainly it helps.

There will be no repeat of 1998 default. Russia has paid off its foreign debt. The oil fund ($157bn) and foreign reserves ($470bn) are enough to deflect anything short of financial cataclysm.

Telegraph (India) on taxes on exports

Excerpts:

Top officials said that a fresh proposal to replace a fixed nominal cess on ore export with a tax of 6-8 per cent of the value of export (ad valorem tax) might be on the government’s agenda.

...
At present, the fixed duty on ore export stands at a low of Rs 50 a tonne in the case of low-grade iron ore and Rs 300 for a tonne of high grade ore.

...

India produces 155 million tonnes (mt) of iron ore annually, of which 89 mt are exported, including about 75 mt to China. But steel makers, unhappy with the government for forcing them to cut prices, say both fines and lumps are exported and they could use fines for making pig iron, if it is available at reasonable rates.

Iron ore spot prices have gone up to $200 a tonne from $140 a tonne in January.

...

The Congress-led government has already slapped a 15 per cent export tax on steel, cut import taxes on mild and semi-finished steel to zero and removed a 14 per cent countervailing duty on construction steel.

Iron ore prices in recent years

Excerpts:

[A] Iron Ore - Annual Contract Prices       
                           Note price agreement prices.
                           Contracts generally made in the spring/early summer between iron ore
                           producers and steel manufacturers. 
                           The prices given below are prices arranged at the beginning
                           of May of the given year.
                           (1) FINES :    the most heavily-traded category of iron ore.
                           (2) LUMP ORE : Lumb ore consists of golfball sized pieces, and has higher iron content than fines.
                           (3) PELLETS :  Iron ore in "pellets" are semi-refined iron ore; blast furnace pellets.

           Iron Ore Prices

           Notes:  Brazil to Europe
           Units:  US Dollars per ton (dry metric ton).

                    (1)        (2)         (3)

                   fines    lump ore     pellets
 contract 
     year  _____________________________________________________________
     1976 |        22.70                   43.80 dollars per metric ton or tonne
     1977 |        23.00                   42.80
     1978 |        21.50                   36.40
     1979 |        23.30                   39.90
     1980 |        28.10                   47.00
     1981 |        28.10                   43.00
     1982 |        32.50                   47.50
     1983 |        29.00                   39.00
     1984 |        26.10                   36.00
     1985 |        26.50                   36.00
     1986 |        26.20                   36.60
     1987 |        24.50                   36.70
     1988 |        23.50                   40.30
     1989 |        26.50                   47.30
     1990 |        30.80                   51.60
     1991 |        33.20                   52.10
     1992 |        31.60                   48.40
     1993 |        28.10       33.00       43.60
     1994 |        24.40       30.40       43.60
     1995 |        26.90       33.30       49.10
     1996 |        28.50       35.20       52.40
     1997 |        28.80       35.20       52.10
     1998 |        29.60       36.20       53.50
     1999 |        26.90       32.20       46.40
     2000 |        27.60       33.90       49.20
     2001 |        28.90       35.10       50.10
     2002 |        28.60       34.30       47.30
     2003 |        31.40       37.30       52.00
     2004 |        37.30       44.40       61.80
     2005 |        64.00       79.00      115.50
     2006 |        76.20       94.00      112.00
     2007 |        83.40                          ' Based upon news of 2006 Dec 22 deal between Baosteel and CVRD for one year starting April 1, 2007.
     2008 |       132.20                          '

   Sources : CVRD, Wall Street Journal, US Steel and other steel producers.

Goal of this blog

In this blog we will collect data and pointers to show that the faulty mining policies and royalty rates in India have cost the mineral rich states of India, especially Orissa, billions of dollars.