The steep decline in iron ore prices in the past few weeks is unprecedented and has caught miners all over the world in a piquant situation. Last week it crossed the barrier of $30s and an official quoted price of $38.65 per dry tonne is no consolation even for the big trio to sustain production and maintain a workable Ebidta. The price is dictated by the continuous drop in steel demand from China, Turkey, Brazil, West Asia and developed regions. It has been reported that the ruling price of the material is dangerously close to even the break even points of major producers like Vale ($34), Rio ($30), BHP ($29), Fortesque ($40) and Anglo American ($26-28) and have already threatened all the expansion plans by these producers.
Chinese domestic miners being high cost producers of the concentrates have significantly dropped production forcing China to import iron ore almost at the same level as last year (853 MT in first 11 months of 2015) not only to use it for steel production but also to substitute high cost domestic iron ore and to carry inventory in expectation of a price revival in the coming months.
Generally it is believed that these prices have reached the lowest possible level as steel demand is certain to move up from now on having also touched the last border. A pragmatic NMDC has taken a cut of Rs 600 per wet mt for lumps at Rs 1,800 per tonne (57% lower than Dec 2014) in the current month while maintaining the fine prices at Rs 1,560 per tonne. The courageous step by NMDC (25% drop) is in response to a steep decline in its net sales and PAT in H1 of the current fiscal.
As domestic demand for steel is yet to rise significantly in the current period, there is not much of pressure for more supply of iron ore at import parity level. The latest price by NMDC should prompt the steel producers, major and minor, to enhance domestic procurement in expectation of impending price rise of the material. Small and medium enterprises in the steel and sponge iron sector would certainly welcome this move as it would cut down their production cost and would also influence the market prices of lumps.
Besides, it would preempt some of the big buyers planning to clinch import deal at the low global prices, which stands just competitive or a little costlier compared to NMDC prices but for the higher grades. As regards availability of iron ore from various states, the pressure on supply is reduced due to fall in demand for steel. As per latest decisions by the government, more mines would be put on auction route in the beginning of next year. The additional costs associated with the bidding procedure (DMF, exploration fund and increased royalty) may initially be a little dampener unless these units are able to fetch a higher price for finished products.
Any lingering of the poor demand for the finished products for one or two months more may lead to a poor response to the auctioning process. Higher capacity utilisation of the existing mines appears to be a cost effective option to enhance availability than taking part in the auction. Railways may consider offering some discounts to encourage extraction and movement of iron ore across the states.
The capacity utilisation of pellet plants in the country is still low and unless the steel prices improve, use of pellets would continue to be restricted and thus any further addition to capacity in pelletisation must be staggered. The export prospects are also not encouraging due to low prices.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal