Supply-side constraints, robust revival in demand to keep iron ore prices up: Ind-Ra

Our Bureau Hyderabad | Updated on January 06, 2021

Measures taken by Central, State govts to address supply shortage have not helped meet near-term demand

Iron ore prices are likely to be elevated over the near-mid-term due to supply-side constraints, clubbed with simultaneous robust revival in demand post-Covid-19-led demand shocks.

According to India Ratings (Ind-Ra), the domestic supply shortage is primarily driven by a delay in the ramp-up of Odisha iron ore mines post auctions in March 2020 due to the high, unviable premiums and Covid-19-led disruptions.

Various measures taken by the Central and State governments to address the short supply have been insufficient in meeting demand over the near term. Although iron ore prices may soften slightly once supply improves, it would remain at elevated levels due to the structural change in the cost of miners paying premium. The global supply side has also been constrained by the supply disruptions in Brazil and South Africa.

Also read: Metal stocks surge as steel producers hike prices again on buoyant demand

Conversely, both domestic and global steel production levels have been on the rise post Covid-19 disruptions. Domestic production has improved since Q2FY21 with output reaching pre-Covid-19 levels. Ind-Ra expects demand to grow further by 16 per cent-18 per cent year-on-year (y-o-y) in FY22 on the back of a low base.

Domestic iron ore prices in December 2020 have increased to ₹4,610/tonne (NMDC). China leads the global demand revival in 2020 and is likely to register a 6 per cent y-o-y increase in crude steel output despite Covid-19 led disruptions, driven by demand from the construction and infrastructure sectors.

Global iron ore prices increased to $159/tonne (Brazil) in December 2020 (75 per cent y-o-y increase) and are at the highest levels since March 2013.

The fundamentals for pellet manufacturers are conducive for growth, given the high domestic realisations led by the strong demand and limited supply, and the high demand from the export market. Domestic pellet manufacturers have gradually reduced export levels from Q1FY21 when the domestic demand was subdued. Captive producers with iron ore mines are better placed than pellet manufacturers who procure iron ore externally, given the high iron ore prices.

If the auctioned Odisha mines ramp up, there is unlikely to be a level playing field with premia being payable by the miners who acquired the mines under auctions compared to those who are not required to pay premium as their mining licence are still valid or they are government miners whose mines are renewed automatically.

Also read: NMDC Q3 iron ore output up 12.3% at 9.6 million tonnes

The differential cost structure among miners will result in varied profitability as merchant miners winning mines at high premia are likely to be at a distinct cost disadvantage and would like to pass on the cost to the customer, thereby resulting in higher iron ore prices for steel manufacturers.

Published on January 06, 2021

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