CY20 has been an eventful year for many reasons and this is true for the Indian iron ore industry too. The minerals auctions earlier this year have had a far-reaching impact on the industry and the after-effects are being increasingly felt as the year draws to a close.
SteelMint estimates that iron ore production in FY21 is expected to contract by 20% to 185-190 mn t.
India produced 245 mn t of iron ore in FY20 – considerably higher than the little over 200 mn t in FY19. The last-minute stocking activities by old lessees of iron ore mines in Odisha before the expiry of their leases on 31stMar’20 was one of the reasons. SteelMint data show monthly production figures in Odisha in Nov’19, Dec’19 and Jan’20 were in the region of 8-9 mn t.
However, production in Odisha slipped drastically after the national lockdown was imposed in late-Mar’20.
While total production from Odisha in FY20 was 145 mn t, the share of mines auctioned in 2020 was roughly half of that at 71 mn t. Now, considering the mandatory 80% production from auctioned mines with respect to production recorded in the last couple of years, the target production from these mines was 24.50 mn t in the Apr-Sept’20 period.
Actual production, however, was just 4.06 mn t during the period.
In view of the fact that as on Sept’20 only 7 of the 16 mines auctioned in Odisha have been able to commence production – 2 bidders are unlikely to sign leases and 3 auctioned mines are subject to legal disputes – there is no immediate prospect for a sudden ramp up in ore production in Odisha.
So, the non-operationalization of mining activities post-auctions for a period of six-odd months this year will contribute to curtailed annual national production, we estimate.
In addition, the possibility of significant new production coming online in the other major iron ore producing states of the country looks distant. PSU miner NMDC’s Donimalai operations in Karnataka – with an EC limit of 7 mn t/year – has got the go-ahead to restart operations after 2018, while the royalty and revenue-sharing issues with the state government are in the process of being worked out by the Union Ministry of Mines.
However, even if NMDC restarts operations in Donimalai at the earliest – in Dec’20 – no significantly high volume can be expected in the last quarter of FY21: according to SteelMint estimates, 3 mn t at the most.
And, despite the incremental 5 mn t of production from the non-auctioned mines in Odisha in the first six months of FY21, we do not expect these mines to add major additional supplies to the market this fiscal.
The forecast of 20% drop in annual ore production, therefore, stands for the moment.
Iron ore demand to drop by 12%
On the other hand, the COVID-19 pandemic has impacted steel consumption and demand in the country, as various industry bodies and ratings agencies have reported. Although the capacity utilization of steel mills has spiked sharply with the country slowly regaining economic momentum, the anticipated downfall in demand is impossible to cover up.
SteelMint expects demand for iron ore – a function of overall steel demand – to shrink by 12% in FY21 to 170-175 mn t compared to consumption of around 195 mn t in FY20.
Note, that there was a surplus in ore production in FY20 despite strong demand hovering close to 200 mn t.
SteelMint projects a shortfall of 6 mn t in FY21 against FY20 in Odisha. However, FY20 can’t be taken as the benchmark as miners ramped up production before the expiry of their respective leases.
Prices: A reality-check
Prices in Odisha have hit the roof post-auctions, with supply shortage, particularly of high-grade ore and iron ore lumps. This also provided a fillip to pellet prices which are hovering close to INR 9,500/t at the moment. In fact, exports are drying up as domestic realizations are about INR 200/t higher for producers.
However, with the operationalization of mines in Odisha, including integrated steelmaker AM/NS India’s virgin Ghoraburhani block in Dec’20 with an EC limit of 7 mn t and also resumption of operations at merchant producer Serajuddin’s Balda block with an EC limit of 15.5 mn t, prices are expected to adjust.
Also, NMDC’s Donimalai is expected to add significantly to supplies in the coming months, checking wild price surges witnessed of late.
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