Despite Covid-19 sending the global steel market into a tailspin in 2020, China’s post-pandemic economic recovery was remarkable, especially from the second quarter (Q2) of calendar year (CY) 2020 onwards. China’s GDP grew 2.3% in CY20, more than the International Monetary Fund’s (IMF’s) projection of 1.9%. Likewise, crude steel production in 2020 stood at 1.05 billion tonnes (BnT) – the 1 BnT mark was exceeded for the first time in history.

Steel Output

Boosts Imports

The Chinese government’s over USD 550-billion stimulus generated exceptional demand from the infrastructure and construction sectors. Domestic consumption growth outpaced demand, slashing steel exports and triggering imports of steel and semi-finished products. China became a net importer of semi-finished and finished steel in 2020, the first time in over a decade, as the country was the first to successfully counter the pandemic. For the whole of 2020, the China Iron & Steel Association (CISA) predicted China’s steel exports to fall 15% on year while imports surged 60% on year.

China’s share of global crude steel output rose to 57.5% over January-November, 2020, as against the 53.3% for the whole of 2019, according to World Steel Association (WSA) data. China’s crude steel production recorded on-year growths for every month since April. Over January-November, China produced 961 MnT of crude steel, up 5.5% on year, while the world output decreased by 1.3% on year to 1.7 BnT, and output from other countries and regions, excluding China, fell 9.2% on year, as per the WSA.

It is not surprising, therefore, that China’s iron ore imports remained buoyant throughout 2020, so much so that prices leapt to their highest since 2011 amid the coronavirus impact worldwide and supply concerns stemming from Brazil – the second biggest iron ore supplier after Australia – due to dam disasters leading to disruptions.

Chinese Customs data reveal that the country imported 1.17 BnT of iron ore, beating its previous record of 1.075 billion tonnes in 2017, despite a decline in December shipments. December wasn’t exactly a stellar month for iron ore, with imports at 96.75 MnT, down 1.4% from November and 4.5% lower than a year ago. Over January-November, 2020, iron ore from Australia and Brazil accounted for 61% and 20% respectively of China’s total iron ore imports during the period, according to the data from China’s General Administration of Customs.

Recovering

Supplies

Global iron ore prices, one of the best performing commodities of 2020, rose 73% in 2020 and another nearly 7% in January, 2021. Much of it was because robust Chinese demand outpaced supply. However, there are now signs that supply has largely recovered. Data shows robust shipments from the top exporters in December. Australian exports were about 79.75 MnT in December, the most since June’s 82.8 MnT and the second-strongest month for 2020. Brazil too shipped out about 33.83 MnT in December, the most since September and well above the range of 20.8 MnT to 24.8 MnT that prevailed from January to May last year.­

One of the world’s leading iron ore miners, BHP Group’s production for the second half of CY20 from its Western Australia iron ore operations was recorded at 144.6 MnT. The output picked up by 5% against 137.3 MnT seen in the corresponding period in 2019. BHP Group’s FY21 iron ore production guidance from Western Australia remains intact at 276-286 MnT.

On the other hand, Rio Tinto recorded iron ore shipments at 330.6 MnT for CY20, up a marginal 1% y-o-y. The company has set Pilbara iron ore shipment guidance at 325-340 MnT for CY21. For Q4, CY20, shipments were recorded at 88.9 MnT, up 8% against 82.1 MnT in Q3, CY20. Total iron ore production marked 2% increase to 333.4 MnT in CY20. Pilbara iron ore achieved strong performance despite cyclone Damien and the pandemic-triggered disruption resulting in deferral of maintenance in the second half of CY20. For Q4, CY20, the output stood almost stable at 86 MnT compared to 86.4 MnT in Q3 CY20.­

Prices

Peak

Globally, including China, iron ore supply may increase by 96.3 MnT, though demand from elsewhere in the world other than China may recover too in 2021 should the pandemic be effectively under control, market intelligence firm Mysteel recently reported. For 2021, China’s blast-furnace steel mills are expected to add on a total of 35.5 MnT/year new iron making capacity, though the actual pig iron output may only grow 19.3 MnT, or equivalent to about 30 MnT of iron ore consumption. The report predicts China’s steel output to grow marginally to 1.08 BnT in 2021, although the country’s Ministry of Industry and Information Technology reiterated on a few occasions that China’s steel output would probably decline from 2020.

Iron ore port stocks also slipped over the fourth quarter of 2020 to 124.25 MnT on January 11, 2021. Little wonder then that iron ore prices climbed USD 7 per tonne in a week to USD 172.25 per tonne in the second week of January. Although expected, weather issues, which typically impact iron ore volumes from the major exporters, may not be severe this year, and could provide additional price support in the current quarter.

Whatever the case, with more balanced iron ore fundamentals and a possible modest surplus, prices may soften and the year’s low may emerge in the second or third quarter of 2021, Mysteel predicted. Incidentally, iron ore averaged over USD 106/tonne in 2020.

Outlook

At present, there are conflicting pulls in the market. Most analysts predict strong demand with only a modest decline in Chinese metal production later in the year. While worries remain about fresh lockdowns in China, after the pandemic resurfacing in Hebei, a key steel-making province, the economic impact will likely be muted.

“Even if people do not go back to their hometowns during the Chinese New Year, the impact on consumption should be relatively small,” a Chinese economist said recently.

With steel prices sliding slowly during the freezing winter months, steel mills’ margins are getting affected due to high raw materials prices. Coke shortage in the domestic market has seen demand for pellets and lumps edge up compared to fines as well as due to restrictions on sintering during the winter months. Port stocks of lumps and pellets are depleting faster than mid-grade fines. However, high prices could propel Chinese imports of fines of differing grades, including from India. An executive member of industry body Federation of Indian Mineral Industries (FIMI) told the media recently that Indian exports will remain strong, at least till March, 2021.

Interestingly, India’s iron ore exports to China, predominantly of below Fe58% fines, boomed in 2020. The world’s top steel producer imported 44.8 MnT of iron ore from India last year, compared with 23.8 MnT in 2019. As much as 92% of Indian exports were to China, propelled by almost 80% rise in prices in 2020.

INDIA: EVOLVING

DYNAMICS

The Indian iron ore industry is going through a churn and production this fiscal is projected to fall by over 30%. Production in the April-October, 2020 period has been pegged at 92.08 MnT – a sharp de-growth of 30% over the same period last year.

Citing SteelMint research, the Indian Steel Association (ISA) has written to the Prime Minister’s Office (PMO) recently: “Odisha contributes over 50% of the country’s annual iron ore output. In the first five months of the fiscal, ie, for the period April to August, 2020, Odisha’s iron ore despatches have been roughly 15 MnT, a fall of nearly 60% compared to 35 MnT in 2019.”

The shortage in Odisha has been mainly due to the change in hands of the expired iron ore leases and evacuation issues. There is a persistent supply imbalance in the state due to many newly auctioned mines failing to start operations. Total production from five auctioned mines (for captive production) was at 1.5 MnT during April-July, 2020, against the targeted production of 17.4 MnT.

In neighbouring Chhattisgarh, half-yearly data recently published by PSU miner NMDC show a 9% fall in ore production over April-September, 2020, to 12.24 MnT compared to the corresponding period last year.

However, the “worst seems to be over”, as a senior JSW mining executive told Steel360. In what should surely come as a huge relief to scores of steel and sponge iron producers sans captive mines, India’s iron ore production has exceeded 20 MnT in December  – the highest monthly production recorded in FY21.

The rise in monthly production is substantial compared to 18.36 MnT in November and 16.72 MnT in October, thanks to increased supplies from Odisha and Karnataka.

Odisha, Karnataka

Supplies Improve

As many as 11 of the 19 auctioned iron ore mines in Odisha have resumed production till November, 2020 and gradual ramping up of operations by JSW Ltd, AM/NS India and Serajuddin & Co among others seems to have driven production volumes to nearly 11 MnT in December – almost double that of August.

Sources in the Odisha government told Steel360 recently that India’s leading iron ore producing state is expected to clock production of 100-110 MnT in FY21 – a decline of over 30% against the record 145 MnT in FY20. However, 2019-2020 was exceptional in the sense that record production happened from mines ahead of the auctions in January and February, 2020.

Production from the non-auctioned mines in Odisha, pegged at 47.14 MnT in the April-November, 2020 period against a little over 40 MnT in the corresponding period last year, is expected to remain at near-100% levels, given the manifold rise in iron ore prices in recent months. India’s largest iron ore producing state recorded total merchant iron ore despatches at 6.82 MnT in December, up 11% against 6.13 MnT in November.

Sarda Mines, which has a long-term supply agreement with integrated steel producer JSPL, recorded the highest despatches at 1.63 MnT for the month against 1.34 MnT in November. State-owned OMC recorded a 10% rise in despatches to 1.35 MnT for December against 1.22 MnT in the preceding month. The state government has allocated two auctioned and non-operationalised mines of Guali and Jilling to OMC with the objective to increase supplies. These mines have a combined production limit of 12 MnT and are expected to resume supplies from the next fiscal onwards.

Further, the state government has informed that bids will be invited for at least six new iron ore blocks by end-January, 2021. AM/NS India, too, has received forest clearance to commence operations at the over 7 MnT/per annum Ghoraburhani Sagasahi block. Supplies, therefore, are likely to increase in the coming days and months. Despatches from Rungta Mines picked up 30% to 1.08 MnT in December, as compared to 0.83 MnT in November, although high prices are encouraging greater exports from the merchant suppliers.

Similarly, production in Karnataka touched 3.6 MnT in December compared to 2.2 MnT in November. Interestingly, JSW Ltd, which produced 2.66 MnT from its four mines in Odisha, has emerged as the leading iron ore producer in the state in December, surpassing captive miners Tata Steel and SAIL as well as heavyweight merchant miners such as OMC.

Moreover, JSW has commenced operations at 7 out of 9 ‘C’ category mines in Karnataka that the integrated steel-maker won at successive auctions from 2016 onwards. As per SteelMint data, JSW produced 0.49 MnT from its mines in Karnataka. While leading producer NMDC mined 0.77 MnT in December, MSPL and other auctioned mines contributed over 2.5 MnT. As reported earlier, Steel360 expects India’s iron ore production to be in the region of 190 MnT in FY21 compared to 245 MnT in FY20.

Reforms in the

Pipeline

In a significant development, the Ministry of Mines has proposed a key amendment in view of iron ore shortage in the country. To strengthen the norms of minimum production/despatch the mines ministry proposes to amend Rule 12A of the MCR Rules, 1960.

In case of non-fulfillment of minimum despatch criterion, the existing Rule 12A states that “appropriate action” shall be taken against the new lessee as per MDPA. The proposed amendment is that the successful bidder has to make a payment equivalent to the revenue share and other statutory levies that would have been payable at the level of minimum despatch target on a quarterly basis – ie 80% of the annual production of the last couple of years calculated on a pro-rata basis.

The government has mooted this financial penalty for non-fulfillment of minimum despatch on a quarterly basis along with the provision that if the successful bidder fails to meet the minimum despatch requirement for three quarters in a row, the government may terminate the mining lease.

Inserting a penalty clause in Rule 12A of MCR, 2016 was an immediate need, as the mines ministry draft states that production of iron ore in India till September, 2019 was 110.95 MnT whereas production till September, 2020 was at 76.01 MnT – a decline of over 31.5%.

The MoM amendment proposal arrives a month after the Odisha government sought departmental approval to slap the successful bidders with penalty, charged at 24% of IBM’s average sales price on monthly shortfall in despatch, to be deducted from their performance security.

Other key reforms suggested by the ministry to enhance supplies include amendment of Section 10A (2)(b) & 10A (2)(c) of the MMDR Act. The proposal is to free up a large number of mining areas applied for prior to 2015 which was opposed by mining companies that had threatened to move court. While refusing their claims, recognised under MMDR 2015, the government proposes to compensate these companies for their exploration expenses from NMET funds. The decision to go ahead with this reform reaffirms that there shall be no deviation from the auction route for allocation of mining rights.

Reallocation of non-producing blocks of government companies, strengthening the minimum despatch norm and allowing captive mines to sell up to 50% of the minerals excavated during the current year (subject to a premium which shall be fixed by the government) are also intended to boost supplies. Moreover, a 50% rebate on the quoted revenue share (premium) will be offered for the quantity produced and despatched earlier than the scheduled date of production.

As domestic supplies improve, and as higher realisations in the export market (due to high global iron ore prices) are expected to boost export traffic, the Railway Ministry’s new iron ore transportation and rake allotment policy seeks to incentivise domestic manufacturing activity compared to exports. This is reflected in the lowest, ‘D’, priority allotted to rake allotment for exports. As per SteelMint data, iron ore and pellets rake movements for exports touched 19 MnT in CY20 – over 35% of the total export movement of 53.85 MnT via rakes.

The new policy accords higher priority to seamless iron ore traffic for domestic manufacturing. This could be part of a broader policy strategy to disincentivise exports at a time when evacuation concerns remain uppermost.