Steel companies hoping to post strong numbers in the January-March quarter riding on a strong demand pickup have come in for a rude shock. A day into the new year, they were faced with a steep jump in input costs, thanks to a 20-22% hike in iron ore prices announced by state-run miner NMDC.
Large companies like JSW SteelBSE 2.31 % and Essar SteelBSE 0.41 % which do not have captive iron ore mines and a host of other medium and small firms which rely on NMDC to meet the bulk of their ore supplies will be adversely hit.
After the hike, experts said steel production costs are expected to jump at least Rs 1,100-Rs 1,300 per tonne, a substantial increase by industry standards.
On Tuesday, NMDC announced a Rs 500-increase in price of lump ore to Rs 3,100 per tonne, or up 20%, while fines will now be charged at Rs 2,760 per tonne or 22% higher, excluding royalty, district mineral foundation, NMET, cess, forest permit fee and other taxes.
The last time NMDC revised rates was in November 2017 when price of lump ore and fines were fixed at Rs 2,600 per tonne and Rs 2,260, respectively.
A top executive at a large steel company questioned NMDC's pricing policy adding that the miner is trying to create a shortage of iron ore in the market by exporting more, despite lower export realisation of nearly Rs 560 per tonne.
"The pricing policy of NMDC is not appropriate and it seems like they slowly want to move towards a system where companies have to import more. With prices of coking coal already shooting up, iron ore is the only advantage India has for steel companies, but that is slowly ceasing to be one," the official said. This will reinforce the distress in the steel industry that already makes up for 24% of NPAs in Indian banks, he added.
Since small merchant miners typically follow NMDC's ricing policy, the latest revision will establish an overall upward trend in prices, according to industry watchers.
Experts feel there is a shortage in the domestic iron ore market but is not big enough to justify a sharp price increase. An Investec report said an estimated 15-20 mt of production has been hit by non-payment of penalty, leading to supply shortage in Odisha and local ore prices will stay strong unless the state government steps in to raise the mining cap to ease the shortage.