Red hot steel passes through the automated production line (Photographer: Vincent Mundy/Bloomberg)

Will These Twin Headwinds Impact Indian Steelmakers?

Domestic steelmakers may be staring at twin headwinds as the world’s largest producer cut output amid a slowdown in demand and prices of iron ore, the key raw material, surge.

ArcelorMittal SA will reduce its annualised primary flat steel production in Europe by 3 million tonnes due to weak demand and rising imports, coupled with insufficient European Union trade protection, according to its media statement. Though the Luxembourg-based company said its decision to lower output is temporary, this indicates growing pressure on global producers, including Tata Steel Ltd.’s U.K. unit.

This also comes at a time global prices of iron ore are hovering near their highest in five years. The raw material costs may rise further as Brazil’s Vale SA suspended operations at its 30-million-tonne Brucutu iron ore mining complex, reversing a lower court decision that had allowed the miner to resume operations.

The world’s biggest miner of the bellwether commodity had recently decommissioned all its upstream units after a fatal dam disaster, impacting production of 30 million tonnes of iron ore. Vale now expects the sale of iron ore and pellets this year to fall to its low- to mid-end of its previous guidance of 307-332 million tonnes, according to its press statement.

Other iron ore producers such as BHP, Rio Tinto and Fortescue Metals Group, too, cut their production guidance for the year.

If the global situation persists, it may affect nearly 120 million tonnes, or 8 percent of total production, according to Edelweiss Research.

Impact On Steelmakers

Integrated steelmakers like Tata Steel and Steel Authority of India Ltd.—those who produce their own raw material—would partially offset the rise in iron ore prices, according to analysts, including Jatin Damania of Kotak Securities.

But they are keeping an eye on the auction of 33 iron ore mining leases that are set to expire in March next year. Any delay in the auction would disrupt nearly a third of iron ore supplies to Indian steel mills, adding to the risk of increase in domestic raw material price. These mines, according to a report by the Ministry of Mines, contribute about 28 percent of India’s total iron ore production.

While integrated steelmakers may remain insulated, Jayanta Roy, senior vice president at ICRA, said any disruption before reauctioning of mines would be negative for partially-integrated producers like JSW Steel Ltd. and Jindal Steel & Power Ltd. as this would lead to a supply crunch and increase their cost of production.

Rakesh Arora, managing partner at Go India Advisors, however, doesn’t agree. Partially-integrated steelmakers, too, will be little impacted as domestic iron ore prices are falling unlike the global rates, according to Arora.