Supply trouble supports domestic iron ore

But global prices have been hurt by a surge in supplies and weakness in Chinese demand



Global iron prices, which have been on a downtrend since December 2013, slumped to $83 per tonne recently, the lowest in about five years. Weak demand from China, which accounts for 67 per cent of the global iron ore trade of 1.2 billion tonnes, along with a ramp-up in production by global mining giants, has seen iron ore prices plunge 38 per cent this year.

The existing global demand-supply gap is expected to widen and thereby keep iron ore prices under pressure. Even as the growth in Chinese steel consumption slows down to 3 per cent in 2014 from 6 per cent last year, global mining giants — Vale SA, Rio Tinto Group and BHP Billiton — are expected to continue expanding supplies.

India: Mining ban takes a toll

The situation in India is, however, quite different. Following the Supreme Court-imposed ban on iron ore mining in Karnataka in July 2011, India’s iron ore production declined from 207 million tonnes in 2010-11 to 152 million tonnes in 2013-14.

While iron imports rose from 1.9 million tonnes in 2010-11 to 3 million tonnes in 2012-13, they shrank to 0.4 million tonnes in 2013-14. Imports are, however, expected to rise sharply in 2014-15.

While the subsequent partial revocation of the mining ban in Karnataka in April 2013 saw the state’s iron ore output go up, it has fallen short of the demand from steelmakers and sponge iron manufacturers in and around the state. Consequently, many small players have been forced to shut shop while others have seen their capacity utilisations dip.

The recent mining ban in the states of Odisha and Jharkhand is only likely to bring iron ore supplies under further pressure, even if temporarily.

While the removal of the mining ban in Goa in April, 18 months after it was imposed, is a positive move, the impact of the same on domestic supplies is not likely to be significant. The low-grade iron ore in Goa is not very suitable for use by domestic steelmakers and is largely exported.

Gradual pick-up in supply

Many previously banned mines in Karnataka have started operations after obtaining regulatory approvals post April 2013. Iron ore production in the state is believed to have gone up to 22 million tonnes in 2013-14.

While this is expected to go up further as more mines commence operations, it is, nonetheless, far short of the steel industry’s annual requirement of about 35 million tonnes from the state. In Odisha, which caters to about 60 per cent of the domestic demand for iron ore, the recent mining ban (excluding the eight mines) would likely reduce output by 15-20 million tonnes.

The state produced 78 million tonnes of iron ore in 2013-14. However, with the Supreme Court having asked the government to decide on mining renewals within six months, the shortfall may be shortlived.

Recent price trends

Domestic iron ore prices vary across states and across different grades of the ore. Prices charged by the National Mineral Development Corporation (NMDC), the largest iron ore miner in the country, can, however, provide some indication on price movements in the market.

NMDC, which undertakes monthly price revisions, decided to keep the prices of iron ore lumps and fines unchanged at ₹4,600 per tonne and ₹3,160 per tonne, respectively, in September, for the third month in a row. Going forward too, the state-owned miner expects prices to remain stable.

With iron ore supplies unlikely to be fully ramped up to the level of domestic demand, prices are unlikely to trend downwards anytime soon.

Even as iron ore production picks up, the expected growth in Indian steel consumption can, alongside, increase the demand for iron ore, a key steelmaking input.

The government’s thrust on infrastructure investment and the recent uptick in the automobile sector, both of which are key user industries, should help boost domestic steel demand, which grew only 0.3 per cent during April-June 2014.

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