Date:20/05/2006 URL: http://www.thehindubusinessline.com/2006/05/20/stories/2006052000301300.htm

Back `Higher iron ore prices to benefit captive producers'

Mr J.J. Irani, Director of Tata Sons and Chairman of the Indian Steel Alliance, believes that high iron ore prices will trigger steel price hikes.

He further says that iron ore supply will be tight this year and in early 2007. Captive manufacturers will benefit from higher iron ore prices, he says.

Mr Irani believes that China may not agree to a 19 per cent price hike in iron ore, adding that China cannot have much differential pricing from Korea and Japan.

Excerpts from CNBC-TV18's exclusive interview with Mr Irani:

Your thoughts on the changes that have happened in terms of iron-ore pricing and whether steel manufacturers will now have some lee way to increase prices?

When we are talking about iron ore, we should first decide on exactly what commodity we are talking about. There are many different types and the one that we are talking about is the high-grade variety, which everyone desires. The price of that in the international market has certainly sky rocketed because of shortages. The spot prices are now around $80 per tonne. I cannot remember anytime when it has reached that level and that will certainly encourage steel producers to increase prices because there is no way that they can make steel without the use of this high cost raw material and therefore it will certainly trigger a series of price escalations in the international market.

Will this price escalation be enough to slow down demand or do you think demand will absorb these price increases?

Iron ore supplies cannot be generated in a short period of time. A time will come when the supply will exceed demand but that is not the projection at present, and certainly during the rest of 2006 and maybe also 2007 steel production will increase. Increased steel production will require more iron ore, the other way is to get scrap but scrap also is in short supply. If somebody wants to make steel they have to use either scrap or iron ore and iron ore is a commodity, which is more easily available but will now have to be priced at a higher level to meet with the demand.

What will the quantum of increase be? Will it be enough to absorb the increase there has been in iron ore pricing?

I cannot speculate on what will be the increase but certainly those steel plants, which do not need to buy their iron ore will be the ones who will benefit because for them the cost of iron ore will remain more or less constant. Majority of steel plants all over the world including the big ones such as Arcelor, Posco, Nippon Steel, all of them have to buy their iron ore in the international market, largely from countries such as Brazil, Australia and to some extent India also. Those who buy will have to pay a higher price.

We have seen most other countries accepting a 19 per cent increase in iron ore prices. China is yet to concede that. Do you see China conceding 19 per cent or do you think they will refuse?

They may concede less. The others have already agreed to 19-20 per cent, they may concede less but they will have to concede a substantial increase in iron ore, there is no doubt about that. I cannot see a situation where China continues to get iron ore from Australia and Brazil at the old rates and the other countries including Japan and Korea paying higher amounts.

A word for the steel manufacturers and the inventory situation now. Do you expect demand to keep increasing and in that sense inventories to remain more tight than it has remained in the past few quarters?

The latest reports from World Steel Dynamics and other research bodies which track steel supplies indicate that the demands are growing. In our country it has grown almost in double digits and therefore the supplies will remain tight. The iron ore manufacturers or the producers have seen this as an opportunity and upped the price of their product and this, in turn, will force steel makers to raise their prices.