China, the world’s largest producer and consumer of steel, is planning to implement an energy rationalisation policy. This will lead to plant shutdowns and reduced steel demand, causing a reduction in prices of raw material inputs

India's largest iron ore mining producer National Mineral Development Corporation (NMDC) has slashed iron ore prices for the December quarter. The price cut came at a time when domestic steel producers are hiking steel prices on soaring demand in the post-monsoon season and a reduction in Chinese imports.

Last week, major Indian steel producers including Steel Authority of India (SAIL), JSW and Essar Steel increased product prices by 2%-4% across the board. However, NMDC slashed prices of iron ore by 5% for its domestic clients and export prices of minerals by 13.3% for the period of October-December.
 
What has forced miners to cut raw material prices? The answer is China. The world largest steel producer and consumer has always been playing a major role in the world steel market. The country's consumption or production impacts the world's production and consumption of steel. Top global miners including BHP Billiton, Rio Tinto and Vale SA, are largely dependent on demand from China.
 
"China controls raw material and steel prices. Any fall or rise in the Chinese steel market affects the world steel market enormously," a senior analyst from Systematix Shares & Stocks told Moneylife.
 
"The current raw material prices are still in the range of $220-$230 a tonne which is still not low," he added.
 
A few months back, most of the miners abandoned the 40-year-old annual contract system and signed quarterly contracts. Last year, the economic turmoil brought about major changes for the iron and steel market; the quarterly basis contract system is one of them. Continuous volatility over raw material and steel prices led both parties to shift to the new pricing system. The new quarterly pricing agreement reduces their exposure to volatility in spot market prices.
 
The Chinese government has recently announced an energy rationalisation policy, which will come into full force from this month. Most steel producers in China will be forced to go in for planned shutdowns due to shortage of power, thereby reducing the country's steel output.
 
According a report published on 28th September by Goldman Sachs, at least 30% of the blast furnaces in China, which have a capacity smaller than 500 cubic meters, are likely to be closed in the longer term in the wake of lower energy efficiency and lack of economies of scale.

 
Another report, complied by Deutsche Bank, says that Chinese steel exports to India dropped for the second consecutive month in August, down another 38% m-o-m in August 2010 following a 57% m-o-m decline in July 2010. Chinese steel exports to India are now down 78% from year-to-date highs touched in May 2010.

The report also added that global steel consumption plunged by 73% on m-o-m basis in August. The drop is the lowest level recorded in CY10. The bank also predicts that global capacity utilisation rates will drop even further.

Since June, rise in unemployment claims and weak manufacturing data indicate a slowdown in actual demand in the US. The sovereign debt crisis in Europe, mainly in Greece, Poland and Ireland, has restricted government spending, resulting in fall in demand.
 
Despite the decline in demand in the international market in recent months, Indian steel companies are seeing positive trends in the domestic market. The Goldman Sachs report adds that domestic consumption continues to be strong, up 9.4% year-to-date against an increase of 2.7% in production last year.

Share prices of SAIL, Tata Steel and JSW have increased by 13%, 39% and 30% respectively in the period of June-September this year. Some giant steelmakers have joined hands to enter the Indian market in the wake of lucrative opportunities in India.

Slow demand in China and the western world would further curtail the uptrend in raw material prices in the future.