Domestic Iron Ore Prices To Buck Global Decline, Riding On Strong Demand, Falling Rupee
Industry structure to re-calibrate with rising share of captive iron ore
Robust growth in domestic demand and elevated pellet prices have shored up prices of iron ore in the country. Over the past six months, while global iron ore prices have been fairly steady at $65-70/ tonne, domestic iron ore prices have zoomed 40-45% on-year.
The spread between landed prices and domestic prices of ore has reduced as a result. Currently, the 62 Fe grade domestic ore trades at a 16% discount to the landed price compared with a 45% discount in fiscal 2017 and a 31% discount in fiscal 2018.
Currency erosion in the past few months has also played a role in boosting prices. While global prices of 62 Fe grade ore have declined by 15-17% between January and August this year, landed costs have declined marginally by 3-5% only.
This has a bearing on 73% of India’s crude steel capacity and 62% of crude steel production that is entirely dependent on merchant iron ore procurement.
The impact would be higher for induction furnace/ electric arc furnace producers whose cost of production rose 11-13% during the first half of fiscal 2019 compared with 4-6% for blast furnace/ basic oxygen furnace producers (cost rise only attributable to rise in iron ore prices). However, steel prices saw a bigger increase (15% rise in long steel prices) over this period, riding on healthy growth in domestic demand, and this has helped offset any impact on profitability.
High volatility in domestic iron ore prices, coupled with uncertainty around the iron ore regulatory structure has led to large steel makers bidding aggressively in recent iron ore auctions.
Says Prasad Koparkar, Senior Director, CRISIL Research, “Of the 17 iron ore blocks auctioned as of August 2018, 14 have been awarded to steelmakers for captive usage. Once these mines ramp up, by FY21, 35-40% of crude steel capacity will be self-reliant, compared with 27% now. The share of captive consumption is expected to rise further with a number of iron ore leases expiring by 2020."
Leases for around 80 million tonne iron ore production capacity are set to expire in early 2020, including 66 MT (17 leases) in just the iron ore-rich belt of Odisha.
That said, next fiscal, the supply surplus originating from lease expiry, amid moderating domestic demand growth prospects, will weigh down domestic iron ore prices. Softening of global prices and an expected currency revival in 2019 will also add to pressure on domestic iron ore prices.
Says Rahul Prithiani, Director, CRISIL Research, “Domestic iron ore prices will stay elevated in the near term, led by opportunities linked to healthy demand growth, weak currency, and rising pellet prices. However, prices will potentially correct by 7-9% next fiscal, led by domestic supply surplus as merchant producers capitalise on peak production capacity before the leases expire.”
This large-scale re-auctioning coming up is expected to alter the industry structure further. Market dynamics linked to rising share of captive usage and bidding results of re-auctions in fiscal 2020 are expected to re-calibrate the industry structure and thereby influence merchant miners’ pricing power.