Domestic steel players hit as ore prices remain firm

It’s about time the government cracked the whip on the speculative forces that are driving up iron ore prices and assure availability of ore to domestic steel companies.

Ore prices rose by around 35 per cent between December and January, due to the Supreme Court ruling which ordered “temporary discontinuation of operations” at six large mines in Odisha — which contributes half of India’s ore production — for failure to pay compensation to the State government.

Rating agency ICRA estimated a 5.5-million-tonne production loss if the mines were out of operation for the entire January-March quarter. But the actual production loss was lower as most of the mines paid the compensation and restarted operations. This softened the ore market but only marginally. NMDC, which increased lump prices from ₹2,400 a tonne to ₹3,100 a tonne, reduced prices by just ₹100 a tonne in March. Its current price of ₹3,000 a tonne is approximately 24 per cent higher than the prices on April 1, 2017.

Sources in the mining sector cite the cancellation of 88 mining leases in Goa in March as the reason for prices firming up. Since almost the entire 20 mt production in Goa was exported, it had little impact on domestic prices.

However, despite the disruptions, India’s ore production is expected to record a decent growth over last year’s 192 mt.

According to ICRA, considering the prevailing 82 per cent capacity utilisation of blast furnaces and 55 per cent capacity utilisation at sponge iron units; the domestic consumption of iron ore is barely 118 mt.

Enough supply

ICRA puts the total requirement of ore including exports (which grew by 22 per cent in April-September 2017 period) at 155 mt. This means even if the Goa output is ignored, the country will still have 20-25 mt additional supplies.

The gap created by cancellation of leases in Goa is unlikely to be unfilled for long. Odisha mines are likely to step up production to reap the benefit. Also, it is unlikely that the Goa mines will remain in limbo for long. Current ore price movement is not supported by fundamentals and is solely driven by speculation. It may help miners like NMDC to make a windfall profit in the January-March 2018 quarter but that might hurt the steel producers and other of user industries.

From April, the price of hot rolled coil increased by nearly 16 per cent to 44,000 tonnne, way above the anti-dumping benchmark.

If the demand pull is good news for the economy, the bad news is it is not seamless and high prices may attract imports which are currently growing by approximately five per cent, in sync with the demand growth.

Meanwhile secondary steel production is down by 6.2 per cent during April-December 2017. Vizag Steel has seen a sudden sluggishness in sales in March, a month when sales are usually robust, say sources.

Vizag Steel produces long varieties, which is used in infrastructure construction. The price of these steel varieties were subdued for last two years till prices moved by approximately 20 per cent in January.

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