INTERVIEW - Tata Steel sees iron ore prices rising

Iron ore prices are headed as much as 35 percent higher this year and will likely pressure the profit margins of steel companies, Tata Steel Ltd Vice Chairman B. Muthuraman said on Tuesday.

"I don't know where it's going to settle down, but it does look 25 percent to 30 percent to 35 percent higher," he said in an interview. "It may be possible that the steel prices may not go up by that much."

"This means the steel companies will come into margin pressure," he added.

Global steel production had tumbled last year as demand from key industries such as construction and automotive shrank. But as macroeconomic data improves and inventories deplete, demand is expected to build this year.

Tata Steel, the world's eighth-largest steelmaker, owns its own iron ore and coal supply sources in India. It sees steel prices rising but not to the extent of the raw materials.

"Steel prices depend on supply and demand, and I don't see the demand going up so sharply this year," Muthuraman said. "So demand not being extremely strong will put a cap on the steel price increase."

Spot market prices for iron ore surged more than two-fold in the last 12 months on strong demand from China and recovery in Europe, and the United States. The price for iron ore remains near $130 a tonne.

Also, global miners are currently in negotiations with the world's largest steel producers in setting a key annual iron-ore benchmark price, a bulk discount to the spot price.

The iron ore prices are typically set each year following negotiations between big suppliers -- Vale, Rio Tinto and BHP Billiton -- and large steel mills.

Muthuraman said he expected the negotiations to wrap up in the next two months.

HUNTING FOR COAL, IRON ORE SOURCES FOR EUROPEAN UNIT

Muthuraman said he expects growth for the company to come from Southeast Asia and India.

"In India, we are going up to 10 million tonnes by next year," he said, referring to capacity.

Tata Steel's total global capacity is about 30 million tonnes, with its European unit Corus contributing tow-thirds of the capacity. India currently accounts for about 7 million tonnes.

Tata Steel has been trying to cut costs by rationalizing operations in Europe and reworking interest costs.

Muthuraman said he wants to make the company's European operations more cost competitive and up to 50 percent self-sufficient in coal and iron ore.

Currently, the company buys both the raw materials for the European unit but will feed about 15 percent of the supply needed from its investment in a Canadian iron ore mine and a coal mine in Mozambique, which are expected to come online next year.

Muthuraman said the company continues to hunt for more sources of iron ore and coal for the European unit.

"As far as Europe is concerned, we are aiming to make that plant more competitive," he said. "We are aiming to own raw materials around the world."

"It will take some time," Muthuraman said, when asked when the European unit will move to growth.

"We want to make it more efficient, in terms of putting in better systems and processes," he added. "I think in 5-6 years time, our European operation will become as efficient as our Indian operation."

(Reporting by Poornima Gupta; editing by Carol Bishopric)

Poornima Gupta

Source: http://in.news.yahoo.com/137/20100310/736/tnl-interview-tata-steel-sees-iron-ore-p.html