Commodity Analysis

Indian iron ore unaffected by global volatility

Satya Sontanam | Updated on February 25, 2019 Published on February 25, 2019

Domestic prices fell as a result of their own supply and demand dynamics

Global iron ore prices have been highly volatile recently on concerns of supply crisis, after the world’s top producer Vale SA’s mining operations were forced to be shut down, following a mining dam collapse. While the international prices spiked immediately in the wake of the news, reaching two-years high, they settled down on reports of increased production plans from other manufacturers and China’s slowdown.

The Indian iron ore industry was, however, unaffected by the developments In fact, the prices fell, playing by their own supply and demand dynamics.

Global scenario

The iron ore market has been in turmoil since January 25, when the Vale SA’s mining dam collapsed in Brazil .

The situation was further accentuated by the Brazilian court order to suspend company’s operations at another mine, Brucutu, on safety grounds. Suspension of these mines would lead to an annual production loss of 70 million tonnes that is roughly 3-4 per cent of the world’s supply of iron ore. Measured, however, as a percentage of the total high-quality ore in supply in the world, the loss due to closure of Vale’s mine, will be high.

So, the concerns over ore shortage in the global market pulled up the prices of iron ore.

By the second week of February, the Singapore iron ore futures contract was 8.4 per cent higher (from January price) at $90.7 per tonne, and the leading global contract traded in Dalian, up 4.9 per cent at $96.4 per tonne.

Prices have, however, cooled over the last week.

This follows reports that Vale and other companies — BHP Group, Rio Tinto Group and Fortescue — will ramp up their existing mining capacities. This is set to reduce the loss of production to about 10 million tonnes.

It must be noted that iron ore prices drop only in case of high-grade ores, while low-grade ores stick to the upward momentum.

The user steel industry might now prefer lower grade to reduce the input costs of higher ore prices.

Global iron ore price movement also depends on how the largest consumer of the world, China, tackles the problem and its economic activity.

Though China’s iron ore mining industry is sufficiently large, production has been impacted in the past several months on account of a strict environmental clampdown.

If China is not able to increase the production to meet its demand, there is going to be an explicit deficit, which could prompt the prices to move higher.

At this juncture, the situation looks uncertain with mine suspensions, environmental restrictions and potential ramp-ups.

India plays independently

Indian iron ore prices are not following international market prices trend now. In 2019, NMDC had cut prices of iron ore lumps and fines to 26 per cent and 24 per cent respectively over the December price levels. Piling up of inventory would be one of the reasons that prompted NMDC to axe the prices. Going forward, domestic iron ore prices are not expected to rise sharply.

According to an ICRA report, India’s iron ore production has been on the rise and is likely to touch 211 million tonnes in FY19 (210 mt in FY18) despite the closure of Goa mines of Vedanta and Donimali mines of NMDC.

Higher production is on account of merchant miners maximising their output before the expiry of mine leases in March 31, 2020. As per a Crisil report, leases for around 80 mt of iron ore production capacity are set to expire in early 2020. This is a sizeable portion of India's production at 210 mt in FY18.

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Published on February 25, 2019
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