Spot prices of key raw materials—iron ore and coking coal—have strengthened during the past two months. Next year’s contracts are expected to be finalised at higher levels. Ergo, these cost dynamics will lead to higher steel prices

Steel prices are set to go up from January 2010 due to increase in raw material costs, like iron ore and metal scrap.

"International prices have gone up, so it's likely that domestic prices will also go up next month," SK Roongta, chairman, Steel Authority of India (SAIL), told reporters. State-run SAIL is the country's largest steel producer.

Led by demand from China, prices of iron ore—the key raw material for pig iron—have gone up sharply over the past two months to $106 per tonne from almost $81-$82 per tonne. Coking coal prices have also gone up to $165-$170 per tonne from $128 per tonne as China imported more coking coal this year.

December being the holiday season in Europe and the US, not much activity is seen in those markets currently, but as traders come out of holidays in January, more activity will be seen in the global steel market, resulting in higher demand.

"With prices of key raw materials going up, cost of production for pig iron manufacturers has gone up and this has forced them to increase prices. We believe that the same factor is going to be applicable to steel prices and we expect them to go up next month," said Kisan Ratilal Choksey Shares and Securities Pvt Ltd, in a note.

Industrial analysts see iron ore prices going up by about 10% to 20% next year on increasing demand as the world economy recovers.

Talks between China, the world's largest importer of iron ore, and suppliers failed earlier following the supplier association's demand on a deeper price cut than Rio Tinto Ltd and BHP Biliton Ltd had agreed with other Asian countries.

According to media reports, the Chinese steel industry has also called for a global opposition to the proposed joint venture for mining between Rio and BHP, the world's second and third largest iron ore suppliers.

Sharp fall of steel prices in the Chinese domestic market since August negatively impacted the global steel market as there was some correction in prices after they peaked in September across all major markets on account of availability of cheap Chinese material. India was no exception and major steel producers reduced prices of flat steel products by Rs700-Rs1,500 per tonne.

But in the past two months, Chinese domestic steel prices have improved by 6%-7%, led by a slight fall in domestic steel production levels as many mills were going for annual planned maintenance shutdowns, which might have led to stabilisation in global steel prices.

Another factor that might have supported the prices is the quantum of purchases and delivery. With about four to five weeks delivery lead time from China, many European stockists, not sure about the domestic demand, were not placing large orders resulting in lower orders for Chinese materials.
"We expect steel prices in the global markets to move a bit in the later part of the first quarter of 2010, as spot prices of key raw materials—iron ore and coking coal—are strengthening in the past one-two months. Next year’s contracts are expected at higher levels, these cost dynamics would lead to higher steel prices," said another brokerage. 

According to a report by industry consultancy Mysteel, this week, iron ore inventories at China's major ports rose by 830,000 tonnes to end at 66.75 million tonnes, while stockpiles of ore originating from Brazil increased by 180,000 tonnes to 19.1 million tonnes, and Indian ore rose by 830,000 tonnes at 13.18 million tonnes. Australian ore inventories fell by 480,000 tonnes to end at 21.95 million tonnes by the end of the week.

Mysteel said that while Chinese iron ore prices remained steady, the average price of imported iron ore increased by 2.3%. Iron ore prices are 25.8% higher than December 2008, it added.

Encouraged by a sudden spurt in demand from the steel and foundry sectors, pig iron producers have also increased prices by 6% to 8% for spot delivery. Experts believe the price rise was needed as pig iron producers are currently operating on wafer-thin margins, with prices of raw materials and finished products having moved up.

With this revision, pig iron for steel consumption was quoted at Rs16,500-Rs18,000 a tonne, while that for the foundry sector was at Rs18,500-Rs20,000 a tonne—a rise of about Rs1,200-Rs1,500 per tonne.