Elevated demand from China and meteorological risks in Australia will keep prices high in the near term
By Kunal Bose
First, it was the Indian Steel Association (ISA), representing the interest of all major producers of the alloy, that drew the government’s attention to the “testing times” steel-makers—particularly those without ownership of mines—were facing because of the double whammy of a spurt in iron-ore exports and a fall in production, principally in the country’s largest and finest quality ore producing state, Odisha. (Incidentally, Tata Steel left ISA in May, allegedly over differences on contentious mining policy.) Soon, it became a chorus of protests against iron-ore exports with associations of sponge iron and steel-forgings manufacturers making common cause with ISA.
Facing rising displeasure of ministries concerned with infrastructure projects implementation, as also auto and construction groups, as steel prices have climbed to multi-year highs and there have been rapid-fire price revisions by steel-makers in the post-lockdown months, ISA has demanded a six-month ban on iron-ore exports, restriction of e-auction sale to steel- and pellet-makers. It has also urged state-owned mining companies to step up production. Pressure is building on the Naveen Patnaik administration in Odisha over the surrender of three recently-auctioned mines and over others where the owners didn’t take the initiative to execute lease-deeds; the demand is to assign the deposits to state-owned Odisha Mining Corporation and Odisha Mining Exploration Corporation.
At the auctions, some steel companies and merchant-miners had quoted fancy premiums for mines whose leases expired in March. Later, they realised that mining operations would not be sustainable if such high premiums are to be paid on the sale of extracted ore. Didn’t Tata Steel global CEO and managing director TV Narendran say “we certainly will never be bidders at these prices. We thought some bids were unreasonably high”? To continue to remain self-reliant in iron ore as it expands capacity through organic and inorganic routes, Tata Steel will certainly remain on the hunt for acquiring new deposits. But as Narendran says, his group’s mine acquisition decisions at all times will be dictated by “prudence.”
Calls for government intervention to rein in prices have grown following MSME and highways minister Nitin Gadkari asking for discussions at the “highest level” to assert if the “55% hike in steel prices in the past six months is justified by rises in cost of raw materials, principally iron ore, labour and power.” But, why the minister suspects that the steel-makers might be indulging in manipulation of production to lift prices is not understandable. In the steel industry, where two major players, namely, SAIL and Vizag Steel are government-owned and producing units using blast furnace, electric arc furnace and induction furnace routes are too many, cartelisation or price manipulation is not within the realm of possibility.
Steel minister Dharmendra Pradhan has offered reassurances that the government was not inclined to “regulate market forces that decide prices,” even while he favoured a ban on ore exports for a given period. In the din of protests against spikes in ore-prices of iron ore, and therefore, of steel products, reasoning has been sacrificed on the altar of sectoral interests. What is sadly overlooked is iron ore and steel in the downstream are more integral to the global economy than most other commodities. What can bring logic to the discussion is taking account of how prices of ore and steel products are behaving in the world market and the factors responsible for price spurts.
Iron ore being the most heavily-traded dry cargo globally—India participates both as an exporter and importer—it is only expected that prices in the world market will leave an impact here. In the current decade alone, prices peaked at $187 a tonne in February 2011 and hit $41 a tonne in December 2015. The steel industry, which regulates product prices based on input-cost fluctuations, has had to live with such fluctuation. Chinese steel-makers, with a commanding share of global steel production and accounting for over two-thirds of seaborne iron-ore supply, want an inquiry on speculation playing a role in the “abnormal rally” leading to doubling of prices of the raw materials in 2020.
Whatever the role of speculation money, iron ore, fetching an year-end price of $175 a tonne on the Dalian Commodity Exchange (DCE), is now the world’s best performing major commodity for the second year in a row.
DCE has imposed restrictions such as limits on single-day open positions and adjustments of premiums and discounts for futures from time to time. However, the commodity remains on a tear as the Middle Kingdom’s industrial engine is at full throttle. What has also helped in reviving the demand for steel and, consequently, of iron ore is Beijing directing stimulus funds to infrastructure. Between January and November, the world steel production was down 1.3% to 1.61 billion tonnes when China boosted output by an impressive 5.5%, to 961.16 million tonnes. Even while India produced 3.5% more—9.245 million tonnes in November on a y-o-y basis—the total for the first 11 months of 2020 shows a fall of 12.3% to 89.4 million tonnes.
In order to support the high level of steel production and ore stockholding as insurance against supply disruptions, Chinese imports of iron ore till November were up 10.9% over the corresponding period the year before. Incidentally, of India’s iron ore exports of 33.39 million tonnes between April and October, China was the destination for ~90%. According to China’s General Administration of Customs, the country’s ore imports up to November exceeded that of the entire 2019’s by over 100,000 tonnes. Will iron ore prices hold in the near term? Most analysts think prices will stay firm in 1Q 2021. In anticipation of a vaccine-related economic recovery across the world, Chinese steel mills are unlikely to let up on building stocks of iron ore. A December landslide at a mine owned by Brazilian Vale and the perennial fear of adverse weather in Australia in the first quarter disrupting operation of mines and ports should keep iron ore prices elevated.
(A former FT correspondent, author is now India Correspondent for Euro Money publication. Metal Market Magazine)