Volatility cloud hangs over Indian ferro chrome market

Sukinda, India’s chromite valley, has been hitting the headlines off and on for the last decade or so for being the epicentre of disputes and controversies over mining rights and much else besides. And the reasons are not far to seek. Odisha accounts for around 98% of India’s chromite reserves, 97% of which lies in Sukinda. Around 12-14 mines operate in the area but, according to green activists, without proper environmental control.

Extensive mining of chromite in the area poses serious threats to the environment through pollution of toxic hexavalent chromium in the soil and water bodies, claims a 2007 report compiled by the US-based Blacksmith Institute.

Chromium hexavalent is mobile in the environment and is highly toxic for all forms of living systems, including micro-organisms, causing oxidative stress.

It must be acknowledged, however, that all the mining majors eager to grab a slice of the Sukinda pie have adopted corrective steps to promote sustainable mining in the valley and mitigate the ecological hazards that accrue from primitive mining practices that have, over the years, taken a toll on the life and livelihoods of the people inhabiting the region. Whether that has been sufficient to address pressing health and environmental concerns, however, is impossible to answer definitively.

Chequere­d History

The mining plan for the Sukinda chromite mine over an area of 406 hectares was first submitted in 1960 by Tata Steel and was approved by the Controller of Mines, Nagpur. The company had first prospected the area in 1952 and, subsequently, got a mining licence from the then Raja of Sukinda for a period of 20 years with effect from October 22, 1952. With the enactment of the Orissa Estate Abolition Act, the area got vested with the state government and the same mining lease was ratified by the state government for a period of 20 years with effect from January 12, 1953.

Due to the remoteness and inaccessibility of the place, non-availability of skilled manpower in the area and lack of a market for the friable variety of chrome ore, the mining originally started on a small scale to supply refractory grade lumpy or­­e to Tata’s refractory plant at Jamshedpur and Belpahar in December 1960. After the establishment of a number of charge chrome plants in India the demand for friable chrome ore shot up in the early 1980s. Accordingly, the mine first went for semi-mechanisation and subsequently was developed as a fully mechanised one in 1984.

The approved scheme of mining for the Sukinda block was valid till January 11, 2013 – that is till the validity of the lease period. As per the recommendation of the Central government, Tata Steel completed a study for undertaking underground mining in the area. The mining scheme was for a brownfield project wherein the mine was proposed to be operated both by opencast and underground means with the objective of converting it to an underground mine in the long term.

Considering the dwindling mineable reserves for opencast exploitation, lack of space for overburden disposal and the long gestation period for development of the underground mine, the company was keen to commence the underground mining operations at the earliest to sustain chrome ore production and meet the requirements of its plants and also comply with the conditions for renewal of the lease. The company also undertook necessary geological, geo-physical and feasibility studies for underground mining. This was essential to start underground mining in order to sustain chrome ore production to meet the demand for beneficiation and cater to the increased chrome ore requirement for the proposed expansion of existing ferro chrome plants and new ferro alloy units.

Operations at the mine were suspended in January 2013 after Sukinda’s mining lease expired and a fresh environmental clearance was rejected due to Tata Steel’s inability in handling the huge overburden at the site. The MoEF, meanwhile, had amended its notification for obtaining environmental clearance for mines other than Sukinda awaiting renewal to give a two-year grace period that ended April 2013. This sop was for developers who were mandated to get environmental clearances for renewal of mines with leases expiring on November 4, 2011 or after.

­However, an environment panel recommended in May 2013 that Tata Steel should be allowed to expand its chromite production from the mine that had come to a screeching halt since January that year. This decision made it possible for Tata Steel to resume mining.

Meanwhile, mining majors such as the Indian Metals & Ferro Alloys Limited (IMFA) among others moved court challenging Tata Steel’s right to mine a share of the total deposits that was much higher than was required by the company. Shortage of raw materials also hit Tata Steel hard and the steel behemoth had to suspend operations at its Bamnipal plant. Finally, the watershed moment in Odisha’s mining history arrived with the Centre amending the MMDR Act in 2015 granting extension of leases to non-captive mines for a period of five years till March 2020.

New Chapter Unfolds

As India transitions to an auctions-only regime, the Odisha government’s latest decision to “de-reserve” the Sukinda mine and put it up for auctions has opened the floodgates of aggressive bidding for the mine in the days to come. This decision actually reverses an earlier decision by the state government to “reserve” the mine for Odisha Mining Exploration Corporation Limited (OMECL) – initially a subsidiary of the Odisha Mining Corporation (OMC) but an independent agency today that can undertake mining activities on its own. However, it was reported soon after that OMECL had invited two private operators to undertake mining in the region.

The opencast mine, operated both as a captive and merchant lease, is now almost 120 metres deep. Converting it into an underground mine could cost at least INR 7,000 crore, according to industry sources. Of the 5,300 ha of chrome ore leased out, OMC holds 3,899 ha or 74% of the area. With environmental clearances of 41 lakh tonnes, it produces 9.8 lakh tonnes, or 29% of the total chrome ore produced in the state. Tata Steel, holding 9% of the total area, accounts for 35% of total production, says a senior executive of a mining company on condition of anonymity.

Therefore, it stands to reason that industry insiders are sceptical of the ability of public sector undertakings (PSUs) to increase mining output in the short term given their desultory past record. Also, had the Sukinda mine been allocated to a state PSU, it would have had to cough up the astronomical initial investment to convert the opencast mine into an underground one.

bidding, by all reckoning, will likely be super-aggressive going by Tata Steel’s recent record, plus the fact that Tata Steel has a sentimental attachment to India’s chrome valley and could, therefore, go all out to retain it.

It may also be mentioned that other mining majors such as Vedanta – eyeing to acquire Ferro Alloys Corporation (FACOR) – is also keen to grab the block. Vendanta’s aggressive bidding at the Odisha iron ore auctions recently might well be a precursor of things to come.

Sources in the mining industry told Steel360 that the ferro chrome market will likely face scarcity of ore in the coming months. Approximately 2.3 MnT of chrome ore will go out of the market until the auctions process is streamlined and production comes back to normal. The Sukinda block has a capacity of 1.79 MnT. Many smelters that were dependant on Tata Steel for conversion will, for the time being, have to depend on the OMC auctions.

Due to the auctions, supply will likely be affected for at least three-four months, although the severity of the disruption will be mitigated somewhat by the Centre’s Ordinance amending the MMDR Act that will allow for seamless transition of leases and the permission to keep the working mines operational while the process for obtaining environmental and forest clearances is still on.

Only a handful of Indian ferro chrome producers have captive mines. Major producers like Tata Steel, Balasore Alloys, FACOR Ltd, IMFA Ltd and Jindal Stainless have in-house chrome ore supplies. The rest of the major smelters like Nav Bharat Ventures, Rohit FerroTech, Visa Steel and others are dependent on merchant miners for their ore supplies. For smelters that are compelled to purchase ore and power, chrome ore prices play a big role in estimating costs.

Ore prices constitute 40-45% of the total cost of ferro chrome. With supply disruption looming large, these companies will be forced to buy expensive raw materials due to aggressive bidding at the OMC auctions, compounding the situation even further. Many ferro chrome producers have already cut down production and have shifted partially to manganese alloys, waiting for the chrome market to regain lost momentum.

Conclusion: Tough times ahead for ferro chrome manufacturers.
Ore Shortage to Trigger Imports?

Industry insiders believe that in the short term, at least, there is hardly any substitute to imports. Indian chrome ore imports are around 3-4% of ore supplies. With supply disruptions and resultant rise in ore prices, the share of imports is set to go up. Meanwhile, with ferro chrome prices sliding in the global market, many producers are also pessimistic about importing chrome ore. Importing ferro chrome seems to be a better option compared to importing chrome ore and then smelting it. Supply disruptions will trigger price rise in the domestic market. So, India wouldn’t be able to produce ferro chrome at competitive prices in the international market by importing chrome ore.

Potential disruption could certainly trigger the cost of production manifold. High domestic prices could also make imports more viable. Moreover, aggressive bidding at the auctions could also indirectly increase the cost of the finished product as producers would want to transfer the additional load on to consumers. Most producers have reduced ferro chrome production which is creating temporary supply shortage in the market. The threat of ore supply disruption usually leads to a piling up of inventory for producers.

However, end-user demand from the stainless steel industry, although steady, is unlikely to grow at an astonishingly fast pace. Therefore, there is the distinct possibility of prices remaining volatile in the coming days – shooting up and then sliding all too unexpectedly. At the present juncture, producers are not confident about their pricing strategy as the dark cloud of volatility hangs over the Indian ferro chrome market.