~By NIRMALYA DEB

China’s economic recovery since the coronavirus outbreak in that country in December, 2019 has been spectacular, to say the least. The rally in the seaborne iron ore market, especially since July, 2020, has been none less spectacular. In fact, iron ore has emerged as the strongest commodity in 2020 due mainly to the explosion in infrastructure spending by the Chinese government to offset the negative fallout of the pandemic.

Prices Unsustainable?

A section of analysts had anticipated that the iron ore rally would subside with the onset of the harsh winter months in China, with construction activity, especially in northern China, coming to a near standstill. Such predictions have been laid to rest with spot prices crossing the USD 160 per tonne mark in the second week of December, 2020 – touching a nine-year high.

Analysts have put the surge to wild speculation on the futures markets, coupled with the fact that demand remains strong at a time of supply disruptions from Brazil and the approaching cyclone season in Australia. A senior executive with the China Iron & Steel Association (CISA) has said that the current price rise is unsustainable and the trend will be reversed when the market settles. Prices will inch downwards as the market digests and materialises the price speculation, he said.

Iron ore has soared over the past month, as resurgence in China’s economy coincides with constrained supply. Elevated prices have already prompted the CISA to call for government intervention. The Dalian Commodity Exchange has toughened trading terms in an effort to rein in speculators. There are calls for setting up a new pricing mechanism for iron ore and improving the supervision of the futures markets.

It is estimated that the spot prices of iron ore may average USD 110-120 a tonne in 2021, compared with USD 109-110 this year. China’s steel sector registered output expansion in the first 11 months of the year, industrial data shows. Crude steel output rose 5.5% year-on-year to stand at 961.16 MnT in the January-November period, according to CISA data. The association expects the country’s annual output of crude steel to exceed 1 billion tonnes (BnT) in 2020, representing year-on-year growth of 3-5%. In November, crude steel output rose by 8% to reach 87.66 MnT, with daily output of 2.92 MnT, according to CISA.

Vale Cuts Guidance

Meanwhile, the Australian government commodity forecaster, the Office of the Chief Economist (OCE), has raised its forecast for Chinese iron ore demand in 2020 but cut its projection for Brazilian exports by over a quarter. The OCE has raised its 2020 Chinese demand forecast by 4.5% to 1.21 BnT from its previous projection of 1.16 BnT in September, reflecting the impact of government spending on transport infrastructure, including rail and road projects. But it now sees Brazil’s iron ore exports at just 269 MnT, down by 26% from its previous forecast of 366 MnT, because of production problems at the country’s largest producer Vale which has trimmed its guidance to 305-310 MnT recently. Brazil recorded a drop in its iron ore export volumes in November. Export volumes stood at 29.2 MnT in November, down 6% from 31.1 MnT in October, according to trade statistics released by Brazil customs.

The world’s largest iron ore consumer and importer recorded imports of 98.15 MnT in November, according to the General Administration of Customs. The imports fell 8% month-on-month on falling shipments from Australia and Brazil amid maintenance of berths at Dampier and Hedland ports. China’s total imports in 2020 till November have been recorded at 1.07 BnT, exceeding CY19’s imports of 1.06 BnT. Monthly average global iron ore fines (Fe 62%) increased to USD 124/tonne, cfr China in November against USD 120 per tonne in October. Prices increased due to fall in Chinese port stocks. Iron ore stocks at major Chinese ports stood at 130.8 MnT towards beginning of November which dropped to 130.3 MnT towards end-November.

The sharp rise in iron ore prices in recent months has been supported by robust demand in China linked to government stimulus measures, the OCE has said. It expects iron ore prices to remain well above USD 100 per tonne until mid-2021 before easing to just over USD 75 a tonne by the end of 2022.

Bullish Outlook

China’s iron ore demand is expected to remain high over the next 12 months, although Chinese steelmakers may seek to reduce production slightly should iron ore prices remain at a level that renders many of them unprofitable, the OCE has said. Demand in many other countries is expected to stay below 2019 levels, with a range of steelmakers in Europe and south Asia remaining in hiatus or shut-down and not expected to return to production until iron ore prices drop.

 

China will release its 14th five-year plan for 2021-25 in March, 2021. The plan is expected to include a renewed focus on infrastructure rollouts and rapid urbanisation, particularly in central and western China, which will in turn impact steel demand, the OCE report states.

But Chinese iron ore demand growth may be nearing its end. “Chinese demand for iron ore is likely at its peak, with a decline expected over the next 10 years as a growing share of its steel production is drawn from domestic recycling. This will result in reduced Chinese dependence on the seaborne iron ore market,” OCE has said.

Interestingly, there is buzz around China’s new metals recycling standards to be published in January which is likely to facilitate ferrous scrap imports by China thereby reducing its dependence on iron ore. However, experts told SteelMint at a web conference recently that imports are likely to be around 6 MnT in the first year (i.e. 2021) and the leading importers are likely to be the government-owned big steel firms such as Baowu. In addition, factoring in another 12-15 MnT of domestically generated scrap for use in blast furnaces, iron ore imports could come down by roughly 30 MnT a year. Japan and US West Coast-based importers are likely to benefit should China’s reformulated metals recycling standards pave the way for scrap imports.

Senior analysts have also forecast that China’s crude steel output could reach 1.2 BnT till 2022 and therefore demand for iron ore may remain strong in the near term. The construction-driven economic rebound could taper off in the first quarter of CY21 as the government tightens credit laws and seeks to rein in burgeoning property prices. However, strong manufacturing demand will sustain the demand for iron ore and prices will stay firm till at least the first half of next year.

The India Picture

The year 2020 has been a tumultuous one for the Indian iron ore industry as the crisis that erupted due to the shortage of the key steel-making raw material – thanks to the non-operationalisation of auctioned mines in Odisha – has been compounded by successive price hikes by both the government and private miners over the last few months.

Total production from the auctioned mines stood at 6.51 MnT in the April-October, 2020 period against a target of 28.70 MnT during the period, given the fact that the mines were required to produce a minimum of 80% of the output as recorded in the previous two years. Production from these mines in April-October, 2019 was 42.31 MnT.

Therefore, production from the auctioned mines is still way short of target. However, the upward swing is hard not to notice. Production from these mines stood at 4.06 MnT in the April-September period. While total production from Odisha in FY20 was 145 MnT, the share of the mines auctioned in 2020 was roughly half of that at 71 MnT.

Out of the 16 iron ore mines auctioned before March, 2020, eight have started production – JSW’s 4 mines, AM/NS India, Kashvi, GM Iron and Serajuddin. Auctioned mining leases of Socied De Fomento Industrial Private Limited (winner of Nadidih iron ore block), Vishal LPG Industries (Nadidih iron ore and manganese block) and Tarama Apartment Pvt Ltd (Teherai iron ore and manganese block) are currently not operational due to ongoing litigation. Jindal Steel and Power (JSPL) and Shyam Ores Jharkhand Private Limited, winners of Guali and Jilling-Langalota iron ore blocks respectively, have not executed the lease deeds with the state government yet.

JSW Steel with four mines and AM/NS India with one are reported to have produced 30% of the rated production capacity by the end of October, 2020. However, about 93% of the total production from the auctioned mines is being channelled for captive use. Therefore, iron ore scarcity persists.

Dwelling on the supply outlook, a senior executive with a mining company told Steel360: “We don’t anticipate supply to improve dramatically at least in the short to medium-term. Supply shortage will, therefore, continue to ail the secondary steel sector for some more months. Supply doesn’t look like stabilising in the near term because the possibility of operations at the newly auctioned mines in Odisha resuming full-scale is remote. Also, as seaborne prices are at multi-year highs, imports too can be ruled out.”

Restart of full-scale operations at the auctioned mines is unlikely, he pointed out, due to the unsustainable premiums quoted for the mines. “Production at these levels is hardly feasible. Therefore, no immediate respite is in sight,” he opined.

“Although there is some relaxation because NMDC has restarted operations at Karnataka’s Donimalai with an EC limit of 7 MnT, the scarcity of raw materials will remain for some time. This can be met either through imports or by renting out the working mines for production,” he added.

In an update, the Odisha government has proposed to allocate three non-operational auctioned mines to state PSU miner OMC. The three mines are Guali (won by steel major JSPL at the auctions), Jilling (won by Shyam Ores) and Roida-1 (bagged by Mesco). The three mines have an estimated annual capacity of 12-15 MnT per annum. The proposal is currently being actively discussed with the Central government.

Penalty or Production?

Paradoxically, India’s iron ore exports are on the rise with increased demand from China. Steel Minister Dharmendra Pradhan recently hinted that a ban on exports is a possibility, considering the tightness in domestic supply.

Meanwhile, the Odisha government’s move to penalise the auctioned mines for their failure to meet Mine Development & Production Agreement (MDPA) commitments could force mines to ramp up production. Many new leaseholders, who had bagged the rights to operate mines in Odisha in January, 2020 had been show-caused in August and September for not producing ore as per minimum production requirement.

The Directorate of Mines, Odisha government, has now sought departmental approval to slap them with penalties, charged at 24% of average sale price, as published by IBM, on their monthly shortfall in despatch, which is to be appropriated from their respective performance security.

Those who won mining rights through auctions must produce at least 80% of the average production of an iron ore mine in the preceding two years – in the first two years of their operation. The need for such a rule under MDPA (Rule-12A of MCR, 2016) was to ensure no new leaseholder could afford to squat on precious mineral resources after bidding high premiums for mines.

The mineral-bearing state’s earning from mining, in royalty and premium, is a factor of both volumes and the average iron ore prices. The shortfall stemming from a not-so-smooth transition of mining rights in the country’s leading iron ore producing state contributed to the price rise of the key raw material to record highs.

This has prompted the steel lobby to seek Central government intervention in imposing higher export duty and even a ban on exports of ore and pellets in the run-up to the next Budget.

Some of the new mine owners had also said that the MPDA targets were annual and, therefore, shortfalls would be calculated at the end of the year instead of on a monthly basis.

A recent letter, dated December 15, from the Director of Mines, Odisha government to the Principal Secretary, Steel & Mines, however, abolishes that view. It proposes to penalise existing lessees by looking at their shortfall against “the targeted monthly despatch calculated on a pro-rata basis”.

Commenting on the iron ore supply outlook, Aruna Sharma, former Secretary at the Union Ministry of Steel, told Steel360: “The supply issue could be solved if the government comes up with a minimum extraction requirement clause. But doubts remain as to how quickly the government can bring it in because supply shortage is a serious issue and needs to be tackled systematically. The mines are currently not operational. However, operations have to start early. Also, steel-makers with captive mines conducting periodic auctions can provide relief to iron ore users. PSUs like NMDC and OMC can also play an important role in this respect.”

In fact, there is no shortage of iron ore in the market. “It is a question of supply management. In the near future more mines are likely to be auctioned and the supply situation should normalise,” she added.