The mystery behind rising iron ore prices

In FY20, India’s iron exports rose 133% to 37.69 million tonnes versus FY19 levels. And over 80% of these exports went to China. In crux, India’s domestically produced iron ore was serving the needs of another market before catering to its own

The mystery behind rising iron ore prices
The industry body sought a direction to put the excavated iron ores for e-auction until the whole stock was sold out.

By Ishaan Jain

Over the past couple of months, the steel industry has witnessed constant dialogue between iron ore miners and steel producers, aimed at reaching common ground on the availability of a key commodity for manufacturing steel—iron ore. While manufacturers of the alloy have gone up to the Prime Minister’s Office (PMO) seeking a ban on exports of iron ore citing sky-high prices, miners of the key raw material—whose pellets form about 60% of the cost of production of steel—claim that steel mills have been importing iron ore to suppress prices of the commodity despite huge stockpiles lying idle. Both sides have made sure to supplement their claims with data.

Industry associations, including the All India Induction Furnaces Association (AIIFA) and the Indian Steel Association (ISA)—representing both secondary and primary steel makers—have written separate letters to the PMO batting for a ban on iron ore exports.

Over April-July 2020, India’s exports of iron ore have risen by a massive 63%. This rise in exports is primarily fuelled by record steel production by the world’s largest steel manufacturer—China. Chinese steel output hit all-time highs in September, as state-backed investment in infrastructure projects took centre-stage amid the nation’s resurgence from the pandemic. This was further corroborated by an Edelweiss report which stated that iron ore imports in China surged 9% year-on-year in September 2020 and iron ore inventory at ports rose to 124 million tonnes from 105-110 million tonnes in July 2020. Consequently, miners including the NMDC have been exporting the iron ore owing to higher realisation for their produce.

The signs were already visible in FY20 as India’s iron exports rose 133% to 37.69 million tonnes versus FY19 levels. And over 80% of these exports went to China. In crux, India’s domestically produced iron ore was serving the needs of another market before catering to its own.
Aggravating the situation is the problem of non-operationalisation of merchant mines in India.

India’s iron ore production over April-September 2020 stood at 47 million tonnes, witnessing a drop of about 50% versus last year. Also, about 50% of the mines auctioned in Odisha this year went to large steel players for captive usage while majority of the remainder, which have gone to merchant miners, are yet to start production.

An industry estimate suggests that over April-September 2020, only 4.06 million tonnes of ore was produced from the auctioned mines. However, 93% of this production was done by JSW and Mittal for captive consumption. The mines were supposed to produce over 24 million tonnes during the period.

Another industry report states that only 12 merchant mines in Odisha are currently operational, while at least 20 are closed and all 11 merchant mines in Jharkhand continue to remain shut. This has caused a serious shortage of the raw material for the smaller steel producers in India’s domestic market. Due to this supply crunch, iron ore and pellet prices shot up by about 40% for six months starting March 2020. Steel manufacturers remain ready to pay a higher price, but availability of ore is still their top priority as alternative sources of the raw material, such as Brazil, continue to face supply tightness in the wake of Covid-19. The Odisha Mining Corporation (OMC) continues to be a beacon in these gloomy times, bringing relief to secondary steel producers by supplying the ore, albeit at higher than normal prices. Normalcy in prices and supply is expected to return in Q4FY21 and early quarters of 2022 when (hopefully) the vaccine starts getting administered to the masses.

But Indian miners, too, have their side of the story. In its counter-arguments submitted to the Ministry of Steel and the Ministry of Commerce in response to steel producers’ letters seeking a ban on iron ore exports, the Federation of Indian Mineral Industries (FIMI) states that “any shortfall in production due to Covid-19 pandemic in the eastern states can be made good by procurement of stocks lying at mine-heads. No mining lease holder would like to export if there is a domestic buyer. Currently, what is being exported is what is not being sought by domestic steel mills.”

The miners believe that since iron ore is produced in surplus in the nation, pellet producers and steel manufacturers choose to buy only grades with above 62% Fe content. There is export duty on exports of iron ore +58% Fe and if domestic producers are ready to purchase this iron ore, there would be no need to export.

Furthermore, the FIMI stated that iron ore stocks lying across mine-heads soared to 162 million tonnes during 2018-19, from 151.44 million tonnes in 2017-18. The rise has been constant over the past few years.

Whatever the case may be, domestic iron ore prices across grades have doubled from Rs 4,000 per tonne to Rs 8,000 per tonne on average, causing a spike in the cost of steel production. And the Ministry of Steel has been proactive in recognising this. The ministry understands how high steel prices can derail the nation’s growth by impeding the construction industry, which looks upbeat as the lockdown ceases.

While steel minister Dharmendra Pradhan has clarified that the government will not intervene in regulating prices since it is a matter of market dynamics, he has discerned supplies to be an area of concern. To tackle the issue, the Ministry of Steel is holding discussions with various concerned stakeholders. In fact, the ministry has already spoken to the Orissa Minerals Development Company (OMDC) on the supply issue. It is considering all possibilities, including a short-term ban on exports. The minister has also urged state governments to initiate some process in form of a policy framework to avoid supply chain disruptions.

While a temporary stoppage in exports of iron ore remains an option to stabilise the domestic market, other options include fixing iron ore rates or taking over closed mines by state or central PSUs. Whatever the choice may be, the actions must be quick as the industry has been reeling for a while now and desperately needs support of the government. As per one statistic, West Bengal has 64 iron and steel mills but not a single unit has more than 15 days of raw material stock available. An ominous December lies ahead if the changes are not implemented swiftly.

The author leads the Metal & Mining Sector, Invest India, the National Investment Promotion and Facilitation Agency of the government of India

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First published on: 21-12-2020 at 06:15 IST