Too Rusty At The Edges

0
181
Rough ride: Mining operations in Orrisa
Rough ride: Mining operations in Orrisa Photo: Rakesh Sen

THE BURGEONING Chinese steel industry has kept the Indian iron ore market buoyant in the past. But a slowdown in the world economy has led to a fall in infrastructure growth — and adversely impacted the demand for steel in world markets. After mid-2008, the sudden valleys in the demand graph of the global steel market sent shock waves into the iron ore sector, effectively knocking out spot prices. “The Indian iron ore market is hit because of grossly undervalued spot prices. Mines are selling at a loss or marginal profits”, says SB Chauhan, advisor to the Federation of Indian Mineral Industry (FIMI).

Other sector watchers agree that the outlook for 2009 is grim. “Small operators in India are likely to be severely hit because of depressed spot prices. They may find it difficult to continue operations because the demand revival emerged with buyers looking for price stability and shifting focus to long-term contracts”, says Magnus Ericsson, senior partner, Raw Materials Group, Sweden.

Revival of the Chinese market will hopefully bail out the small operators from India

During 2007-08, iron ore miners in India enjoyed much higher spot prices compared to long-term contract prices because of considerable demand from Chinese importers. While only a handful of Indian iron ore companies like MMTC (a government of India enterprise) held long-term iron ore contracts with Japan and South Korea, most private mine-owners engaged in spot cargo shipments. “Under normal circumstances spot prices will always earn a premium over contract prices, but imbalance of supply-demand created a unique trend reversal with long-term prices higher than spot prices,” argues Chauhan. This transformed an extremely profitable Indian industry in 2007-08 into a break-even or loss-making one in 2008-09.

The Indian government stepped in, supporting the sector by adjusting the ad valorem export duty on iron ore fines to nil and iron ore lumps to 5 percent in the interim budget announced in February 2009.

The duty cuts have helped, but only marginally: Chinese buyers are asking for an import price of $50 to $55 per metric ton of ore. “Today, it is increasingly difficult to sell iron ore fines at even $50 per metric ton FOB (free on board) at Indian ports”, says an Indian trader. These price levels are about 40 percent of the 2008 iron ore prices at their peak. Exports in 2007-08 were 104 million tons; by March 2009, volumes touched 100 million tons.

Ericsson argues that if 2007-08 had seen iron ore prices suddenly shoot up by 75-95 percent, a sharp fall to 40-50 percent of peak levels would bring prices back to early 2007 prices — at which point supply-demand dynamics would be in balance.

High domestic freight charges in India are an added disadvantage. “Rail freight charge is a major problem as transport cost constitutes 50-70 percent of the final Indian prices,” says Chauhan, maintaining that the 2003 freight hike from the 120 class category for iron ore to the highest freight bracket of 200 Class is completely unjustified.

Global prices are controlled by the Big 3 — BHP Billiton, Rio Tinto and Vale. Unfortunately, India falls out of the longterm contract league of the Big 3 and faces the brunt of pressure from buyers such as the Chinese. Even the slightly lowered sea-freight rates have not helped Indian miners shore their business. For the iron ore barons, the once rich vein seems to have petered out.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Comment moderation is enabled. Your comment may take some time to appear.