Iron ore prices are falling swiftly, reversing a sharp uptrend seen since September, when they had declined to sub-$90 per tonne. Since then, prices continued to increase despite low global steel output growth. The reasons for this increase in prices have been laid at China's doorstep, as the economy's demand for steel has been recovering and producers have been stocking up on ore.
But China does not think that is the only reason, and last week the country's National Development and Reform Commission accused large miners of manipulating prices. Recently, the Chinese government decided to put in place measures to cool its property market, which was interpreted as being negative for steel demand. These developments came on the heels of a decline in Chinese iron ore imports in February, which was interpreted as an end to the restocking process by steel mills.
The net result has been a 13.2% decline in iron ore prices in just a month, taking them to a level last seen in end-December. Steel prices, too, have been declining and China's domestic flat rolled steel price has declined by 10.7% in the same period. While a decline or a moderation in prices was expected, the pace of the decline has been quite sharp.
What impact will this have on the domestic producers? Iron ore producers such as Sesa Goa Ltd are already burdened by the ban on mining and exports in key states such as Karnataka and Goa. Its outlook depends on a resumption of mining in both the states and not on the price levels.
But steel makers can be affected by falling international steel prices. In April-February, the output of major steel producers has increased by 9.6%, according to data from the Joint Plant Committee, a data collector. Total steel output increased by only 3% as output of smaller steel producers has declined by a small margin.
Domestic users have been importing, too, with imports rising by 13.4% and that, in turn, has led to an increase in exports as producers are faced with a surplus. Falling steel prices, therefore, can have a direct impact as imports become cheaper and exports become less remunerative.
On the brighter side, a recent report by Nomura Equity Research said that while it expects the steep global prices to moderate, it does not see a major risk to domestic prices as they have already been trading at a 5-8% discount to import parity prices. But the outlook can turn gloomy if steel prices continue to slide in this fashion.