The Hindu Business Line : Owning iron ore mines does not benefit steel cos much

Chennai, Dec. 21 Ownership of iron ore mines is no great advantage to a steel company, according to Mr B. Muthuraman, Managing Director, Tata Steel Ltd. Tata Steel has owned iron ore mines for the last 105 years, but it is only in the last five years that it has been an advantage.

“In the rest of the years, if we had imported iron ore, it would not have made any significant difference,” he said.

Mr Muthuraman, who was here to take part in the ‘Pan IIT 2008’ event (of IIT alumni), said this in response to a question as to whether steel companies that owned iron ore mines secured an undue advantage in selling their own ore to themselves at international prices.

“Steel companies do not want to own iron ore mines. It is a nuisance,” he said, adding that opening up iron ore mines, which could be in jungles, called for developing those areas so that employees could work there — an expensive proposition.

It is cheaper, he said, to import the ore from (say) Australia. For most part of the last several decades the financial advantage of captive iron ore was never more than $10 a tonne “which is not much”, he said.

He said that the profitability embedded in transfer pricing iron ore was a recent and temporary phenomenon. “Iron ore prices are already coming down,” he said. “In one year nobody will be talking about it.”

Steel prices

When pointed out that according to some steel user industries, in India steel sells at a good $150 a tonne above international prices, Mr Muthuraman put up a stout defence of domestic steel prices.

He refuted that steel prices had not come down in tandem with international prices. “I don’t think the market understands what ‘steel prices’ means. What is the price of a shirt?” he countered, implying that there are products available at several price points.

Mr Muthuraman said that for the first seven months of the calendar year, Indian steel companies, at the behest of the government, kept the domestic prices lower than international prices. The “loss” on this account, according to him, works out to Rs 600 crore to the industry. “Who will give us this money?”

Asked why domestic steel prices have not come down in tandem with fall in the prices of raw materials (iron ore and coking coal), Mr Muthuraman said that raw materials are bought on annual contracts.

disadvantage this time

As such, while the steel companies see a fall in prices — and, this year, in demand too — they do not get the advantage of fall in input costs. He said that the disadvantage this time is far higher than the advantage in the previous cycle, when raw material prices were rising.

Steel prices have slid from about $1,200 a tonne in July to $550 now. On another occasion at Pan IIT, Mr Muthuraman told Business Line that he does not expect prices to come down further.

In the case of Tata Steel, he said that the company’s products command a 15 per cent premium over the market prices. This, he said, is because the company sells in such a way that it helps its customers reduce their inventory drastically. The reduction in inventory results in value for the customer. “Am I not entitled to a share of that value?”

Asked to elaborate, Mr Muthuraman said that Tata Steel has begun selling construction steel cut to the specific requirements of the customer — a key learning from Natsteel, the Singapore company that Tata Steel acquired two years ago.

As a result, the customer need not buy in bulk and cut the bars to his needs at the construction site, “which is a very inefficient way of doing things.” He said that there are “hundreds” of learnings from acquisitions, especially from Corus.

Tata Steel, Mr Muthuraman said, has brought in many improvements in the process of making steel. For instance, it has devised (and patented) a method of bringing down the ash content of the coal from its captive mines.

Until a year ago, Tata Steel’s beneficiation plant (which ‘purifies’ the coal), used to lower the ash content from about 40 per cent to 17 per cent, or to a level just adequate for using the coal in steel making. Now, the beneficiation plant is able to lower the ash content to 14 per cent. This has resulted in an annual financial advantage of Rs 300 crore, Mr Muthuraman said.