India’s Supreme Court has lifted the ban on mining in Goa, after a year-and-a-half moratorium that has halted the state’s exports and cut off more than 100 million tons of Indian iron ore exports according to the FT. Some 37 m tons of India’s 208 m tons of iron ore production came from Goa in the year ending April 2011 but a ban in 2012, aimed at curbing illegal mining, halted exports from Goa and neighboring Karnataka, reducing India’s 117 m tons exports in 2010 by 85% according to Reuters.
The Indian Supreme Court has capped exports at 20 m tons for now, in itself not enough to materially impact global supply but a minor addition to rising Australian and Brazilian output just as fears of slowing Chinese demand weigh on prices. The bearish arguments for further price drops are compelling as Reuters points out.
Competition Still Fierce
As Chinese GDP growth is slowing and the probability of a steel intensive stimulus is waning, BHP Billiton last week raised its full-year guidance by 5 million tons to 217 million tons, while Rio Tinto is boosting output to 300 million tons.
Australia’s third-ranked producer, Fortescue Metals Group, is targeting 41.6 million tons in the current quarter, an increase of 10.1 million tons on the previous three-month period, Reuters reports. Brazil’s Vale is aiming for annual output of 360 million tons, rising to 400 million in the longer-term. India’s small 20m tons is therefore not going to have a major impact particularly as the grade is of lower quality than Australian or Brazilian iron ore.
Indeed, as we have reported before and Reuters observes, grade is becoming the critical issue. With Beijing applying ever more stringent pollution limits on steels mills the expense and pollution of sintering low grade iron ore is making domestic and probably Indian material much less attractive. This is probably why imports from Australia have held up even as steel production has struggled.
Reuters reports there has been a 19.4% increase in Chinese imports in the first quarter of this year, some of which has been taken up in financing deals and is sitting in inventory but some will have been consumed by steel makers. As Reuters observes, Chinese domestic iron ore is increasingly expensive to mine and is suffering declining ore grades, with the average dropping to about 21.5% iron content from 31% just 10 years earlier.
Grade Beats Quantity
Australian and Brazilian ore, by contrast, averages closer to 57% iron, often more, and hence gives producers a major cost advantage and consumers a product that doesn’t require pretreating. This probably explains why iron ore prices haven’t fallen farther and faster than they already have, and why they may not fall as far as many are predicting even as supply continues to rise. The Indians, meanwhile, may struggle to find Chinese buyers for their lower grade ore and the Supreme Court’s cap of 20 m tons may seem less a cap and more a tough target in the year ahead.