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What explains this rapid progress in iron ore prices?

Source : BUSINESS_STANDARD
Last Updated: Mon, Jan 14, 2013 19:21 hrs

In an otherwise instructive guidance for all steel stakeholders, global rating agency Fitch Ratings in its 2013 outlook steel raw materials producers’ report says India stands the risks becoming a net importer of iron ore in 2013-14. This, by any yardstick, is a far-fetched observation. Federation of Indian Mineral Industries president H C Daga, a no-taker of a possibility of this kind, says, “The ore supply situation has become tight in the wake of a ban on mining in Karnataka and Goa. In other states, normal excavation is being derailed following judicial and state orders. In a normal year like 2009-10, we produced 219 million tonnes (mt) of ore, met full requirements of our steel industry and showed our capacity to meet any future domestic requirements without any cutback in exports.”

Thanks to continuing mining restrictions in several places, now progressively loosened in Karnataka, Daga estimates the 2012-13 ore production will be between 110 mt and 120 mt, against 169 mt last year. Even then, meeting ore requirements of local steelmakers will not be an issue for two reasons. First, a good portion of the 75 mt of metal is made here by way of melting scrap. Second, mounting pithead stocks, largely a legacy of the past, need evacuation. In Odisha alone, such inventories around iron ore mines are close to 50 mt, says Daga. No doubt, mining restrictions in major iron ore bearing states have prevailed on Fitch Ratings to take such a view of the sector.

In what is claimed to be an attempt to rid the sector of irregularities like digging out more minerals than actually declared and violation of any statutory rules, the Odisha government has slapped fines of nearly Rs 38,000 crore on 196 leaseholders. Hopefully, most of the cases would be amicably’ settled through negotiations. In fact, the government has set the ball of negotiations rolling. The mining ban first come in Karnataka, where among others the country’s largest single location mill of 10 mt belonging to JSW Steel is located, coming into effect in July 2011. Subsequently, in Goa it sent some steelmakers scampering for ore. Because of its dependence on Karnataka mines for ore, JSW saw contraction in capacity use. Local ore supply tightness in some centres would explain some volumes of ore imports.

At the same time, mining dislocations coming on top a disturbingly high export duty of 30 per cent and rail freight led to nosediving in ore exports. Iron ore fines, for which local demand has now only begun to grow and then also at a slow pace, have an overwhelmingly large share in our exports. China is the big destination for Indian ore. According to mining officials, the import quantity involved is of much less concern than the precipitous fall in exports rising to 95.14 per cent in October 2012 on a month-on-month basis. Nevertheless, NMDC Chairman Chandra Shekhar Verma remains steadfast that “clampdown on illegal mining will benefit the sector in the long run”.

No wonder, data compiled by Bloomberg show India’s share of China's ore imports in the first 11 months of 2012 fell to 4.9 per cent from 11 per cent in 2011 and a high of 21 per cent in 2007. India’s major retreat from export aided Australia mainly to lift its share of Chinese iron ore seaborne trade to 47 per cent, up from 43 per cent in 2011. Supply drought from India is one important reason why spot ore prices climbed so strongly in December after sinking to a three-year low in September. As is happening with growing intensity, China's restocking and destocking of iron ore are driving world ore prices. This was much in evidence in the last quarter. Remember, the rise of over $60 a tonne in ore prices happened between September and December despite European steel demand remaining 25 per cent below the pre-recession level. By far the biggest of them all, ArcelorMittal, with considerable exposure in Europe, has its debt awarded junk status.

At one point in December, Chinese port stocks of ore were down to a three-month low of around 70 mt and that triggered major buying by local traders and steelmakers. This took ore spot prices to $144.9 a tonne end-December at China’s Tianjin port from about $88 a tonne four-and-a-half months ago. In a further progress, the principal steel making raw material is now done at close to $160 a tonne, a jump of more than 80 per cent over the September level. Incidentally, the mineral fetched less than $14 a tonne in 2002. In the first place, iron ore stocks build-up has got much to do with the improving outlook for the Chinese economy after slowing for seven consecutive quarters. China is to grow eight per cent this year and this is facilitated by renewed emphasis on infrastructure development and manufacturing activities. Leading miners like Fortescue Metals have responded to rising ore prices and overall improvement in market outlook by reviving projects which were shelved when the mineral earlier slumped below $90 a tonne. Expect China to now recommission many of its high-cost iron ore mines.




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