Rising iron ore prices bring no comfort to Indian ore producers

Rising iron ore prices bring no comfort to Indian ore producers

International spot iron ore prices have been rising since July, reversing the sharp fall seen since April. This is the first calendar year of the shift by global iron-producing companies from annual price benchmarks to quarterly pricing for iron ore purchases.

The volatility in prices will be transmitted swiftly, compared with earlier years, and reflect in the performance of both iron ore and steel companies.

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From their peak in April, Chinese iron ore (62% iron content) fines’ import prices fell by 34% till early July. This was mainly due to a slowdown in steel production in China, due to the government’s desire to curb high rates of industrial growth, partly driven through indirect measures such as curb on emissions and energy use. Since China contributes nearly 45% of global steel production, and depends on imported iron ore, the effect on prices was visible. Global steel producers, too, limited their production to match supply to demand, as reflected in global steel industry capacity utilization, which fell from 83% in April to 73% in August.

But steel production has improved since then, partly due to better demand in other regions, including developed markets. Iron ore producers, too, dug in for higher prices and appear to have got their way. Also, the plight of the Indian iron ore producers became an advantage for them. The ban on iron ore exports from Karnataka is one of the key reasons for better iron ore prices globally. The 62% grade iron ore has now recovered by about 40% from the low of April. Since 1 November, prices are up by 14%.

The demand outlook for Indian iron ore producers, therefore, appears good. But their performance has been hit by a difficult operating environment on the ground, due to Karnataka’s ban on iron ore exports and time consuming procedures for lifting ore in other states such as Orissa. Share prices of companies such as Sesa Goa Ltd and NMDC Ltd have fallen from their 52-week highs by 36% and 53%, respectively.

Both companies have a sizeable capital investment plan, with Sesa Goa having to make an open offer to shareholders of Cairn India Ltd, a firm being acquired by Vedanta Resources Plc, which has a controlling stake in Sea Goa. NMDC is in the process of vertical integration, setting up steel plants, and has recently formed an equal joint venture with Russia’s OJSC Severstal to set up a steel plant in Karnataka. It will be years before these plants come on stream. In the meanwhile, the increase in iron ore prices is a good sign for these firms, provided they are able to pass on the price hikes to consumers. They will benefit most, however, only when the ban on exports goes.

Graphics by Yogesh Kumar/Mint

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