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Raw material security haunts steel majors

Recent developments clearly indicate that raw materials are engaging more interest compared to steel.

Recent developments clearly indicate that raw materials are engaging more interest compared to steel. A $90 billion behemoth Glenstrata (possibly) is emerging with a possible all-share merger of Xstrata, primarily a coal producer with other minerals added to its product line and Glencore, a trading company with large networks, warehouses and production facilities in mining and minerals.

This merger, it is widely believed, would not attract anti-trust provisions and other oppositions in the manner in which the earlier proposed merger of BHP Billiton and Rio Tinto

got embroiled and thus, by its very nature, would combine the strength of production, marketing and warehousing operations. The proposed merger would enable the unit to reap benefits of spot prices at distant locations in the event of sharp movements in iron ore prices. The report that Arcelor Mittal would invest only in mining of iron ore and coal and not in steel in 2012 would also not surprise many especially in the context of a sustained low margin in steel business since Q2 of 2011.

The mining units of the largest global steel company has earned a Ebitda margin of 49% in 2011 as opposed to a 0.048% Ebitda margin in Flat segments and 0.07% margin in Long products. With a production level of around 54 million tonne of iron ore and 8.3 million tonne of coal, the company also undertakes merchant shipping. Last year the company has planned near self-sufficiency in raw material in tune with augmentation of steel production. With focus only on mining investment, South Africa would be immensely benefited in getting maximum investment from Arcelor Mittal and other mining companies. Vale has already announced big investment plans on iron ore and coal projects in Guinea and Mozambique.

These are some of the unique developments in pattern of investment for the current year. Assuming that subdued market conditions in Europe, Japan and West Asia continue at least for some more months, global steel supply would outstrip demand leading to inability of the steel producers to obtain higher margin for steel operations. Although long product market may observe a better scenario with a growing demand from the construction sector, the processing and manufacturing segments are showing signs of stagnancy. Such a scenario would hardly attract fresh investment in steel capacities. Rather raw material security would be receiving an overriding priority among the steel producers and prompt the miners to spend on fresh acquisition or further exploration of the existing mines.

Indian steel market having in-built potential to grow in view of abundant infrastructure deficit may still prompt steel makers to invest in capacity augmentation. But the urge for raw material security is already haunting the steel majors and this may result in changing the pattern of investment in 2012

in favour of acquiring mines, both indigenous and abroad, obtaining leases and forging long term tie-ups. Investment in brownfield expansion would result in additional capacities

to emerge to cater to the rising demand. But Greenfield steel plants may find a rival in raw material sourcing projects and coming months may only strengthen this trend.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal

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First published on: 23-02-2012 at 03:53 IST
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