MILLS TRYING TO REGAIN SOME CONTROL OF INPUT COSTS
Vertical integration by steel
companies upstream into raw materials has not been given importance
for many years. Long-term supply contracts with annual price
adjustments were felt to be adequate to prevent shortages -
especially as those price adjustments were often reflective solely
of steel companies’ ability to pay.
But now things have changed dramatically.
Last year’s shortage of iron ore has made it a valuable commodity.
And the three companies who now control more than 70 percent of
supply are cashing in.
Access to raw material supplies is once
again a strategic issue for the steel industry. This is demonstrated
by several recent investment decisions. Posco has to import all the
iron ore needed for its two Korean plants; but for its next
substantial expansion phase it is proposing instead to go where the
iron ore is and build an integrated steelworks in India’s Orissa
This part of eastern India – along with
neighbouring states of Chhattisgarh and Jharkhand – are attracting
record volumes of inward investment on account of their substantial
reserves of iron ore and other minerals. Mittal Steel and
non-ferrous mining firm Vedanta are among the other potential
investors in the region.
Japan has for decades been the main Asian
market for raw material suppliers, and has benefited from its
position as a long-term buyer of large tonnages. Australian mining
companies now have a more attractive market in China. Japanese mills
are concerned about security of supply and are moving to buy
shareholdings in iron ore and coking coal mines.
As a result, iron ore investments are
suddenly back in fashion. New iron ore projects in Australia, Africa
and South America are being funded partly by steel companies. Some
in the iron ore industry say this shows the market is working as
they should – the price has risen in order to generate the funds
needed to expand production capacity.
But the oligopoly of the Big 3 may not have
done itself many favours by this year’s price hike. In the short
term their profits will benefit, but long term they may lose market
share. Diversity of supply used to be one of the basic principles of
the steel industry’s raw material policy, and the mills’ new
investments in iron ore seem likely to go increasingly into projects
that will compete with the Big 3.
For instance, backers of the Hope Downs
project in Australia reckon to have letters of intent from Chinese
and other steelmakers for the whole of the 30 million tonnes per
year that they plan to produce. Steel producers are investing in
iron ore projects in countries all around the world – from Iran to
Liberia, and from Mongolia to Argentina. A sea change is taking
place in mills’ attitude to upstream integration, as they strive
to get more control over raw material costs.