After a party, there is usually a hangover. This truth was recently reinforced by the roller-coaster action in global iron ore prices. The metal gained lustre early in the month, touching a two-year high, on optimism over higher infrastructure spending in the US after Trump’s victory. The morning-after came when port data showed ample supply and China placed curbs on speculative trading.
If these did not sober things up, global mining giant Rio Tinto announced job cuts in Australia citing a challenging outlook. Since November 1, prices have fallen nearly 12 per cent in Australia.
The local scene for prices is, however, different. State-run iron-ore major NMDC raised ore prices by 20-23 per cent (for lumps and fines) in October and left prices unchanged in early November. The price hike in October led to concerns and rumblings in the industry. Juxtaposing the local situation with the global one, it is hard to see NMDC’s logic in the price hike.
This is however not the first time that local dynamics differ from global fluctuations. For example, in 2012 and 2014, when mining bans were imposed in Goa and Karnataka, local prices climbed. But the current situation is very different from the past, for a few reasons.
For one, there is higher ore supply locally. Data from rating agency ICRA shows that ore production jumped 23 per cent in 2015-16. It increased by nearly 26 per cent in the first half of 2016-17 to 84 million tonnes (mt) compared with the same period the previous year. This is due to the lifting of mining bans in various States. With nearly all miners looking to raise output, supply may be plentiful.
Demand may not, however, keep pace with supply growth. The steel industry, a key consumer of iron ore, has been lacklustre. According to the World Steel Association (WSA), demand in India is estimated to grow by 5.4 per cent annually in both 2016 and 2017. While this is much higher than the flattish growth projections globally, the faster pace of supply addition may continue to depress pricing power.
One possible reason that justifies the price hike may be related to the export situation. Export duty on iron ore (with iron content less than 30 per cent) was removed in the 2016-17 Budget. The Indian Railways withdrew the dual freight policy for transportation — different rates for domestic consumption and exports — to aid iron ore exports.
These moves provided incentives to the more lucrative export business. Iron ore exports were on a downtrend — falling from 117 million tonnes (mt) in 2009-10 to 6.12 mt in 2014-15, chiefly due to mining bans and the global price situation. It dipped to 5.32 mt in 2015-16 but exports have been brighter in 2016-17, when 5.29 mt have been exported in April-July of this financial year, led mainly by a spike in demand from China. Between April and September 2016, iron ore handling at major ports more than doubled — from 7.25 mt in the first half of last year to 17.5 mt.
Imports have fallen. From April to August 2016, iron ore imports dipped to 1.59 mt, falling nearly a third from last year. This may not be cause for joy as one of the reasons for the low imports is very likely the glut in the local market as a result of greater ore availability.
While the export-import situation seems promising, the question is how long this can be sustained, given the global oversupply. There are reports that most of the Chinese demand was due to speculation and the country is reining in such trade. And as global prices start to fall, imports may become attractive to many more Indian iron ore users. These trends may cap local prices.
There are other issues at play as well. Steel manufacturers are saddled with high debt and have been raising various issues related to the iron ore price hikes. For example, NMDC’s dual pricing policy — selling the ore at different prices in different States — was questioned by the Karnataka Iron and Steel Manufacturers Association. The steel makers say that NMDC, which used to have an identical policy, hiked e-auction prices in Karnataka to take advantage of the iron ore shortage. In September 2016, Supreme Court however ruled in favour of the miner, noting that the sale price is governed by market conditions.
Also, given the capital investments made by many iron ore miners globally, they may continue to produce iron ore to earn any revenue. Operational costs are not very high, so increasing production does not add much incremental expense. This can exacerbate the over-supply situation, limiting the price upside.
On the demand side, the shift to aluminium bodies in cars to meet strict emission norms globally may dent steel use. According to the World Steel Association (WSA), global steel demand is set to grow only by 0.2 to 0.5 per cent, given the various global concerns. This would, in turn, limit demand for ore.
That said, any pick-up in global demand may be a positive for price. In India, a revival in infrastructure growth and, hence, steel demand can boost the prospects of iron ore producers. But until these green shoots are seen, NMDC’s high prices may only be short-lived. The positive for ore prices is the strengthening of dollar, which can make local supply and export more attractive in the local currency.