Mittal stokes row over raw material costs

09:50, April 02, 2010      

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Lakshmi Mittal, chief executive officer of ArcelorMittal, the world's biggest steelmaker, stoked a row over how global prices are set by telling consumers that raw-material costs may push steel rates up 21 percent.

"The cost of producing steel is going to go up and will be passed on to customers," Mittal said in an interview in London. Benchmark European hot-rolled coil prices will rise by $150 a metric ton in the second quarter, he said.

Steelmakers are passing on costs after Vale SA, the largest iron-ore producer, scrapped a four-decade system of setting annual prices and boosted prices for Japanese steelmakers as much as 90 percent. Carmakers, the biggest users of steel, are crying foul. The European Automobile Manufacturers' Association, which represents companies including Volkswagen AG, PSA Peugeot Citroen and Fiat SpA, said members want European Union regulators to "tackle distortive developments" caused by the changes from mining companies.

"The necessity to increase prices is generating the ire of customers and a bitter battle is raging," said Christian Georges, an analyst at Olivetree Securities who has tracked industry and resources for 15 years.

Benchmark hot-rolled coil currently costs about $700 a ton, based on Metal Bulletin data. The coiled steel is used by firms from Toyota Motor Corp, the world's biggest carmaker, to Royal Philips Electronics NV, the largest lighting company.

Eurofer, a group representing steelmakers in Europe, said a shift to shorter contracts for iron ore at higher rates may boost costs for their customers by as much as a third.

"Steel producers will have to pass these rises onto the consumers," Eurofer Director-General Gordon Moffat said. "It's going to create a great deal more volatility in prices."

Producers will attempt to counter those swings by forcing automakers to abandon annual supply contracts, making changes in car prices more extreme, Moffat said. European auto businesses are "very concerned" about the increase in the price of iron ore, industry association ACEA said in a statement.

Steel accounts for about 10 percent to 15 percent of the manufacturing cost of a car, ACEA said.

Without higher prices, profit margins at steelmakers, still recovering from the worst slump in demand in six decades, will be squeezed after Brazil's Vale won a benchmark 90 percent increase for iron ore from Sumitomo Metal Industries Co for the quarter starting on Thursday, and BHP Billiton Ltd, the world's biggest mining company, said it will sell most of its output to Asian mills on shorter-term contracts.

"The winners in the short term will be the miners," said Colin Hamilton, an analyst at Macquarie Group Ltd. "The losers are probably the ones that haven't adapted their systems to this change. I would suggest some of the European steelmakers."

US producers of the metal benefit from being based in the only nation that's a net exporter of all three key raw materials, iron ore, metallurgical coal and steel scrap, Michael Gambardella, a New York-based analyst with JPMorgan Chase & Co, said in a March 11 interview.

Source:China Daily


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