Oxygen 80 m 3 0.08 6.40 6.40Ferroalloys 0.014 t 1400 19.60 19.60Fluxes 0.521 t 30 15.63 15.63Refractories 0.011 t 600 6.60 6.60Other costs 1 13 3.25 9.75 13.00By-product credits -20.00 -20.00Thermal energy, net -2.68 GJ 12.50 -33.50 -33.50Electricity 0.122 MWh 150 2.75 15.56 18.3Labour 0.64 Man hr 35 5.6 16.8 22.4Depreciation 40.00 40.00Interest 44.00 44.00Total 95.6 284.78 380.37
Raw Mateial Dynamics
As it is evident form the above table that raw material cost consist of about 65% of the total cost of production of hot metal.If we factor in the current iron ore prices of $130/ton the cost of production goes up by $97 to $477.96. As per ourunderstanding we expect the prices of raw material to remain strong for the forseeable future. In the iron ore segment, theworld is dominated by ony few players viz., BHP Billiton, Rio Tinto and Vale of Brazil. Together they control northward of 75%of the world iron ore market. After the collaps of last year’s negotiation with the China Iron & Steel Association, the iron orecompanies returned back with vengence, where they have offerd to sell their products to steel companies at a price which is100% higher compared to the last year’s price. In the recently concluded deal with Eurpoean Steel makers the pricecommanded by the iron ore producers have been accepted by the EUROFER, much to their dismay and reluctance. Apartfrom the high price, the iron ore producers have also stipulated that vhence forth the long letm contracts are going to be seton quarterly basis contrary to the previous 1 year time frame.Same is the case with the coking coal. The prices quoted by BHP Billiton, one of the larget producer of coking coal in theworld, is in the vicinity of $200. Some are quoting it at $250-300 for delevery in the 2
quarter of FY2011.As it can be seen from the above discussion the prices of raw material has risen at acclerated pace in the last one yearcompared to the prices of finisned steel. Thus, going forward, citeris paribus, the steel prices in the international market aregoing to catch up to this hike in the raw material prices as steel majors all over the world will continue to pass on the hike incost of production to its ultimate consumers.
Demand Side Dynamics
Now, analysing the situation from the demand side as well, things are looking very price positive for the steel industry. As wecan see that despite slower growth in the export front, the Goldman Sachs China Activity index, gross domestic productindicator for China, at the moment is growing at the rate of 14% annually. The Chinese government has taken up themandate to make its economy a self sustaining one and as such is spending heavely to improve infrastructure to enhance itsown standard of living and enhancing purchasing power of its citizens and from the look of it it seems they are doing preetygood job as well.