Dhruv Goel is the MD of SteelMint, a comprehensive online portal for steel news, prices, analysis, and policy matters in India. SteelMint is a dedicated information service provider for all those involved in the steel industry, covering the entire market from producers and manufacturers to traders and end users. It publishes news, commentary, fundamental market data and analysis, and daily price assessments that are widely used as a reference price for many steel manufacturing companies, traders and brokers in the physical markets.With a 4-year operating history, SteelMint has more than 5000 customers in India across the entire steel and steel related raw materials (iron ore, coal, ferro alloys) space. Its customers include various steel participants (producers, consumers, importers, exporters and domestic traders), iron ore miners, iron ore intermediaries,and coal
The iron ore situation in India has been going from bad to worse because various restrictions are being imposed and there are delays in getting approvals to start mining. In FY15, iron ore output and availability will see a sharp drop across major states except Chhattisgarh. Although Karnataka will see its output increase from 18mn tonnes in FY14 to around 20-21mn tonnes in FY15 this is a bit misleading —10mn tonnes of dumps (that is 5mn tonnes of usable iron ore) were auctioned in FY14, which is why FY15 will see a drop in iron ore availability.
For Karnataka, in FY16, iron ore output should move up to 24-25mn tonnes because some mines may get approvals to start operations. Mineral Enterprises is waiting for final approval — this will see a 3mn-tonne mine opening up. Sesa Sterlite is waiting for MoEF’s clearance and lease renewals after which it will be able to re-start its iron ore mine—this is expected to take around 6 months.
Orissa will see a sharp fall in its output in FY15 if there are further delays in opening up the 18 mines that are shut because they haven’t got lease renewals yet. Orissa’s iron ore output should fall by at least 15-20mn tonnes in FY15 (it was 72mn tonnes in FY14). In the first half of FY15, output was 22mn tonnes, which is a yoy fall of 25-30%.
We haven’t seen any further progress in the process of renewing the leases of these 18 mines after CEC submitted its report to the Supreme Court. Orissa’s government has requested a 3-month extension to the Supreme Court’s deadline of 16th November 2014 for taking a final call on renewing the leases. The state is trying to partly compensate for the drop in output by increasing the mining done by Orissa Mining Corporation (OMC). OMC plans to increase its iron ore production from 1.8mn tonnes in FY14 to 3.3mn tonnes in FY15 and 4mn tonnes in FY16. Its eventual plan is to increase the capacity to 18mn tonnes by FY20.
The situation is similarly bad in Jharkhand where large iron ore mines have been shut for want of lease renewals. This issue will probably find some kind of solution only after state elections or court interventions.
Iron ore imports into India have seen a significant jump over the past few months and JSW Steel and Tata group are the leading importers. But, these imports face various logistic bottlenecks and the inland freight costs are also very high — these are deterrents for large-scale imports. Iron ore imports into India between April and October 2014 were 5.2mn tonnes – in the same period last year, they were just 300,000 tonnes. Total imports in FY15 should come up to 10-11mn tonnes — and even these will not be sufficient enough to meet domestic shortages.
The major issues that iron ore importers face are higher waiting time for vessels to berth (at ports) and rake availability. Within ports, Krishnapatnam has emerged as the best to import iron ore. The waiting time for berthing in ports like Paradeep and Haldia is 10-15 days but in Krishnapatnam it is just 1-2 days. This higher waiting time not only leads to higher demurrage costs, but it also leads to uncertainty, given that global iron ore and steel prices are so volatile —see, a 4-day wait for a vessel carrying 50,000-60,000 tonnes of iron ore increases the total cost by about US$ 1 per tonne!
Rake availability is also a major issue for importing iron ore, because preference is given to coal supplies. Except Krishnapatnam port (which is currently loading 20-21 rakes a day) other ports are getting only 4-5 rakes a day for loading iron ore. Krishnapatnam is expected to handle the largest quantum of iron ore imports in FY15. It has already exceeded its full-year target of handling 3mn tonnes of ore during the first seven months of FY15. April-October 2014 iron ore imports at the port stand at 3.5mn tonnes, which represents 62% of total iron ore imports into India.
Pellet capacities in India (merchant and captive) have jumped from 67mn tonnes in FY14 to 88mn tonnes in FY15. However, these increases have not helped ease off the scarcity in iron ore lumps because most of the merchant pellet plants across India are operating at just around 40-50% utilisations. Shortage of iron ore fines has forced various producers to cut back on their production. Pellet producers situated at Barbill (hub for iron ore trading in Orissa) are also finding it difficult to source fines and hence they have limited production. Pellet production using imported fines is not economical, even if the logistics are arranged.
Because of the domestic shortages, its price is firm in India even when international iron ore prices are falling. There is strong demand from various pellet producers and blast furnace operators and this has helped iron ore miners in Orissa and Jharkhand to hike iron ore fines prices recently. In fact, these prices can go up by another 300-500 rupees per tonne if the lease renewal issue for iron ore mines in Jharkhand is not resolved soon. Because of higher fines prices and shrinking volumes, the margins of pellet producers have seen significant erosion.
Unlike fines, there is not much room for price increases in iron ore lumps prices, despite the shortages. This is because sponge iron producers are already operating at thin margins and this has limited miners’ ability to hike prices. If the miners hike lumps prices any further, sponge iron production will get affected negatively, and this will pull down volumes. This has been the major factor in the 200 rupees per tonne price cut by NMDC for November 2014 shipments.
A fall in e-auction coal volumes and iron ore shortages have significantly impacted sponge iron producers in the eastern belt of India. Sponge iron production is estimated to be around 21mn tonnes in FY15 compared to 24mn tonnes in FY14. The smaller producers have felt the impact badly — they are larger in number and account for 50% of sponge production. Small producers include plants with a per day capacity of 100/200/300 tonnes. The larger guys have managed their production levels. Higher cost and falling realisations (which have corrected by Rs 400-500 per tonne compared to Rs 1000-1500 for long steel products) have significantly pressured the margins for these small sponge iron producers. Any further fall in prices or increase in cost will see further production cuts from them.
Declining steel scrap prices is a major risk to sponge iron prices and production. Imported scrap prices have corrected by US$ 40 per tonne over the last month. This can pressure sponge iron prices and eventually impact production.
The lower steel demand over the past year has already seen primary producers capture a good amount of market from the secondary producers. However, further disruptions in secondary steel production will not significantly benefit primary producers as these are getting replaced via imports. Long steel imports have seen a strong pickup in the past couple of months because of the fall in global steel prices. April-October 2014 long-steel imports have touched 720,000 tonnes as against insignificant imports in prior years. These are not expected to jump much further from current levels (monthly rate) as expectation of anti-dumping duty has been acting as a deterrent for any large scale imports. The Central Board of Excise & Customs has also recently issued a circular asking for steel imports to be compliant with BIS norms. This will make the rate of imports slow down further as only a few Chinese steel mills are BIS compliant.
Full year long-steel imports are expected to be in the range of 1mn to 1.5mn tonnes in FY15. To give you a perspective, total long-steel production in India in FY14 has been 30mn tonnes and in the first half of FY15, it has been 15mn tonnes. Of the total long production, around 2/3rd is produced by the secondary steel sector.
Domestic steel prices are still trading at significant premiums to the imported prices, especially in the long-steel segment. These subdued prices (internationally) along with lower demand can put pressure on local prices going ahead.
Primary producers can see further price falls to the tune of Rs 500-1000 per tonne in flats as well as long products. Import offers from China for Longs vary between US$ 440-450 CIF India, which is similar to secondary steel prices, but still at a significant discount to primary producer prices. Offers from primary producers are currently at Rs 39,000/39,500 per tonne in Mumbai. Relatively lower import volumes (compared to size of the longs industry) and pre-qualification for primary producers in various government projects will see this premium continuing.
Import offers from China for flat products vary around US$ 490-500 CIF India. This amounts to a premium of Rs 3000 per tonne, much higher than the normal premiums to imported prices, which range between Rs 1500 and Rs 2000 per tonne.
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