Indian iron ore

Non-renewal of mining leases has put a strain on India’s iron ore users as the companies are starving for raw material.

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A report in The Economic Times said the shortage had left companies such as Essar Steel and Jindal Steel & Power struggling as their capacity utilization has shrunk to less than 40%.

The report goes on to say that unless leases are renewed in a hurry, the continued shortage and under-utilization of capacity could pose a threat to the finances of sponge iron and pellet companies, putting their total investments, worth billions of dollars, at risk.

Miners and steel companies are worried. For example, Vedanta Group chief Anil Agarwal tweeted last week asking the government to hurry up with clearances for reopening iron ore mines in Goa. Goa’s mining companies handle 50% of India’s iron ore exports. Agarwal also asked the government to abolish the existing export duty on iron ore.

Agarwal has made his stand on ore exports from India clear on earlier occasions. He has often said it was ironic for India to be producing only 100 million tons a year even though it had the ability to produce 600 mt a year of iron ore.

Agarwal’s angst is understandable for the Vedanta Group company Sesa Sterlite, one of the largest ore mining companies in India based in Goa, was doing rather well on the export front before mining was banned about two years ago.

Even as the Goa government is about to bring in a new mining policy to reopen mines, the falling prices of iron ore in the global market and the export duty make it a very unattractive proposition for Sesa Sterlite to sell iron ore abroad.

The government is caught in a piquant situation – if it continues with the 30% export duty, miners cannot export the ore at high rates and would be forced to sell it locally, and if it removes the export duty, steel mills will be left to buy imported iron ore since the shortage would increase domestically as most of the ore would be exported.

The government of India seems to have decided to tread the middle path. It is now being said that the government was likely to introduce a “differential export duty” on iron ore. Under this, producers of low-grade raw material will have to pay low export duty rates, and according to this report the move would help the struggling miners of Goa.

If the proposal is, indeed, implemented, it would have the government charging different rates for exports of various grades of iron ore rather than the present uniform rate of 30%.

But it could be too late if you read a recent report in The New York Times. China is one of the biggest importers of Goan low-grade ore, but according to the NYT report, China was looking at Malaysian mines to get its own quota of cheap ore for profit reasons more than anything else. The report pointed out that the Chinese steel industry was reluctant to rely exclusively on Australia and Brazil for its ore supply.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

India’s new government immediately has to tackle a crisis brewing in the iron ore sector. Just a few days before the new government took its oath of office, India’s Supreme Court ordered almost half of the iron ore mines in India’s top producing province, Odisha, shut down because of the local government’s failure to renew decades-old mine leases.

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The ban has dealt a body blow to expectations of the iron ore industry worldwide, and particularly of the belief that India would retake its position as a leading ore exporter.

Odisha Production

Odisha produced more than 70 million tons of ore in the last fiscal year from 56 operating mines. Now, the ruling court has shut down 26 of them. Which translates into about a cut of about 40 million tons.

Analysts said the move puts a hurdle in the plan of new Indian Prime Minister Narendra Modi, who has often said he would like the country to export steel and not iron ore.

The ruling has sent all those connected with the sector into a tizzy. The verdict will force Indian steelmakers to cut output or import expensive iron ore. Among the companies that rely on ore from Odisha are Tata Steel Ltd. and Jindal Steel and Power Ltd. Most of the mining in Odisha is done by state-owned Odisha Mining Corp. Jindal has already purchased about 12,000 tons of low-quality iron ore from Goa, according to available government data, a first in years. Many sponge iron plants in neighboring State of Jharkhand, too, are dependent on Odisha ore.

How the Goa Ban Affects Odisha

Goa, which ranks high among the iron ore producing states, has traditionally exported most of its iron ore to China since Indian steel mills prefer higher-quality ore.

The high court had earlier imposed mining bans in Karnataka and Goa to halt irregularities. MetalMiner had reported in April how the Goa ban, imposed in September 2012, had been lifted, but with an annual cap of 20 million tons. With a fresh ban in Odisha, supply is under further pressure. The move is unlikely to lift global iron ore prices given the limited flows from Odisha.

The Odisha state government is now working overtime to renew the licenses of the affected mines within the court’s stipulated six-month period. It has assured miners that within the next two months, it would be able to renew licenses of 10 of the 26 mines that were ordered shut by the Supreme Court. Because of all the earlier bans, India has already slipped to tenth on the list of leading global iron ore exporters from its previous number three position.

A few days ago, industry lobbying group the Associated Chambers of Commerce and Industry of India (ASSOCHAM) dashed off a letter to the Finance Ministry asking it to consider ordering the government-owned National Mineral Development Corporation (NMDC) to stop exporting iron ore to Japan and Korea. As per an earlier contract, NMDC exports about 2.5 million tons to these two nations. When the domestic Indian steel industry is struggling to meet its requirement for iron ore, exporting of the precious raw material should be halted.

Sohrab Darabshaw contributes an Indian perspective on industrial metals markets to MetalMiner.

Having registered the Indian steel industry’s lowest growth rate ever, most of India’s steel companies are reeling from low domestic consumption and the reduced value of the rupee. They have either cut the prices or are actively contemplating it.

A far cry from earlier this year when some, including the publicly-owned Steel Authority of India (SAIL), had increased prices.

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Though the official growth figure for the steel sector in the last fiscal year has not been announced by the Indian Government, most analysts here are unwilling to peg it at over 1 percent and some insist the 1 percent figure is a very charitable estimate.

Reports in the Indian media have reported it to be between 0.5 to 1.5 percent. A report in the Financial Chronicle, quoting analysts, said the Indian steel sector has seen a listless growth of less than 1 percent for 2013-14.

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Government indecisiveness, an election year and a delay in project approvals have all resulted in a slowdown in the auto, real estate and infrastructure sectors negatively impacting demand for steel.

The FC report quoted Sanjay Jain, analyst with brokerage firm Motilal Oswal, saying that the steel sector had witnessed only 0.6 percent growth in the first 11 months of FY14. Demand continued to remain low in March, too.

That was the trigger for steel companies to slash prices even before the onset of the monsoon season in June, when steel prices historically begin to correct themselves in India.

Now the appreciation of the rupee against the US dollar combined with falling international steel prices has forced steelmakers to marginally cut prices of flat steel product like hot-rolled coil (HRC) in order to stay competitive with cheaper imports.

A report in DNA, however, said some steelmakers were contemplating increasing prices of long products, especially themo mechanical treatment (TMT) bars since they are still in demand. Tata Steel, India’s largest private producer was contemplating hiking TMT rates. Because of these hikes and the cooling of raw material prices, the margins of steel companies may not be impacted as severely this quarter, but that seems to be the only silver lining from this data.

Essar Steel, which only produces flat products, has already marginally lowered prices of some commodity grade flat steel mainly due to rupee strengthening. Another major steel company in western region has also cut its HRC price by about US $15 per ton.

JSW Steel has said it is contemplating a price cut of up to US $200 per ton. Others such as Kalyani Steel said that they have not yet decided on the price cut, but would make a call soon.

According to research agency ICRA Report, the near term outlook on the profitability of Indian steel players has improved, given the soft price trends of key raw materials.

ICRA believes that, in the longer term, volume growth will be critical as fresh capacities are likely to be commissioned in the next two years. Unless demand improves significantly, overall capacity utilization levels and profitability of steel players will remain impacted.

Sohrab Darabshaw contributes an Indian perspective to MetalMiner from New Delhi.

In an attempt to earn higher profits, iron ore miners in the south Indian state of Karnataka new seek new opportunities for exports, this time in the form of pellets according to the Business Standard.

As the Indian federal government has waived the entire 15 per cent duty on export of iron ore pellets, not surprisingly, many miners have begun to consider the possibility of diversifying into the manufacturing and export of pellets. The news story suggests that domestic steel plants also face supply problems of iron ore lumps even as some steel manufacturers have started buying pellets from overseas sources of supply.

Until last year, Karnataka, a leading state for steel and iron ore miners had led India to an iron ore surplus only to have that lead now reversed. Steel mills and iron ore miners in Karnataka state as well as in the other parts of the country, not only face a shortage of iron ore but they have also suffered from lost profits. As a result, steel mills and iron ore miners have pursued other options to increase their profits. The primary method obtaining profits involves making and exporting pellets.

Reports suggest that the production of iron ore in key Indian states has declined and the country has produced only 208 million tons of iron ore in 2010-11 compared with 218.5 million tons in 2009-10. Subsequently, India has also registered a decrease in exports of iron ore. India, the third-largest global exporter of iron ore in the world, had exported 117.3 million tons in 2009-10. The exports had dipped by over 36 percent to 56 million tons in the April-February period last fiscal year against the prior year.

The shortage of iron ore came as a result of a decision by the Supreme Court of India last August to ban the illegal mining activities in the southern state of Karnataka. The Court had banned mining operations in the state following the recommendations of the Central Empowered Committee. However, in April of this year, the court partially lifted the ban and some believe that privately owned iron ore miners in Karnataka state will likely resume operations by July 2012. The southern state of Karnataka accounts for a quarter of India’s iron ore output. The state produces 16 million tons of iron and steel in a year, or a little less than 25 percent of the country’s total production. Regarding pellets, Karnataka state currently contributes about 36 per cent of the national production of pellets.

Pellet production capacity in India will likely reach 70 million tons (mt) this year and 90 million mt by 2014. Pellet capacity has increased both from green field and brown field projects undertaken by existing pellet plants and integrated steel mills. Available figures suggest that global pellet production last year hit  400 million mt and in 2010, 388 million mt. According to the Business Standard seven pellet-making plants operate in Karnataka state with an installed capacity of 15.4 million mt. India’s export of pellets in 2010 stood at 3.7 million mt. However, export of pellets from India will likely increase considerably with the waiver of duty on the export of iron ore pellets.

Market observers like the notion of zero duty on pellet exports because it will motivate more companies to set up plants in the country. Some now believe that companies will look to set up bigger pellet plants to sell raw materials internationally.

 

Steel and iron ore companies in and around the south Indian state of Karnataka may have a little chance to cheer with the news that Supreme Court of India (SC) has allowed the auction of iron ore already lying in stockyards, under the supervision of a monitoring committee, reports Business Standard.

The report claims that hardly 8 million metric tons of iron ore is left for auction in the Karnataka state, which is barely sufficient to run the furnaces of the steel mills in and around the state for two months. In addition, they expect another 2 to 4 million tons of additional ore stored at various stockyards of miners and private traders to be made available if the SC approves auctioning those.

The Court has directed the Indian Ministry of Environment and Forests to “revisit” clearances given in light of the reclamation and resettlement (R&R) program. The Court has allowed Category ‘A’ mines, or mines spread over 50 hectares or more, in Bellari district in southern Karnataka to restart operations after environmental clearance. The SC had earlier granted permission to state-run National Mineral Development Corporation (NMDC) to mine up to a million tons of iron ore per month.

Until last year, India had a surplus of iron ore reversed, but now the country has slipped into deficit because the SC had taken stern action last August to nab illegal mining in Karnataka state.

Shutting down miners’ operations amid threat of government actions has seen a massive cut in iron ore supply, forcing steel mills to look for alternative sources of raw materials.

Karnataka accounted for one-fourth of India’s iron ore output. The state produces 16 million tons of iron and steel in a year, which is a little less than 25 percent of the country’s total production.

The state also produces more than a fifth of India’s total iron ore production, which is around 220 million tons annually. Of this, about 80 percent comes from Bellary-Hospet region at about 40 million tons per year; the Tumkur and Chitradurga districts meet the rest of the requirements.

Except NMDC, which is already permitted to mine a small amount of 1 million tons every month, no other company is currently operating their mines in the state.

Due to the shortage and ban on iron ore mining in three Karnataka districts — namely Bellary, Tumkur and Chitradurga — the steel industries in Karnataka are not able to run smoothly.

Due to the acute shortage, most of the plants got shut down and those that are running are operating on much lower capacity than actually they operate.

Leading steel companies including JSW Steel and Kalyani Steel are in dire need of the key raw material.

JSW sources 40 percent of its iron ore requirements from NMDC, but the balance is bought from private miners in Karnataka. So, the resumption of the mining would enable the company, among other firms like Essar and Ispat, to source ore from Karnataka miners.

The Court, while banning the mining, had permitted auction of 1.5 million tons of iron ore per month through the e-auction route from the stock of 25.88 million tons, lying at the mines in the state. The CEC (Central Empowered Committee) has recommended to release 1.5 million tons of iron ore through e-auction, which had been approved.

As per court directives, the material release on eAuction will not be permitted for export. It will only available for the domestic steel industries.