Will Fe 62% become the new benchmark in iron ore, especially for the inventory emanating out of Odisha? SteelMint noticed supply of the high-grade Fe63% ore has dried up from the Odisha miners who are now habitually selling 62% or even 60-61%. However, NMDC is maintaining its fines at a minimum Fe 64% and the Karnataka sector is supplying Fe 62-65% as the maximum range.
With Odisha contributing a whopping 145 million tonnes (mn t) to India’s total iron ore production of around 245 mn t in FY20, any tremor in this space travels swiftly across the raw material platform for steel makers in India. SteelMint has not heard of many bookings for Fe63% in the last couple of months. Majority of OMC’s auctions too are in the Fe60-62% band.
Why the shift?
But what are the reasons for the deemed shift to the new benchmark pricing? Is it because the merchant miners want to lower their cost by keeping the grade inferior? The Indian Bureau of Mines (IBM) has differing pricing slabs for various grades. For instance, IBM’s average sales price (ASP) for fines over October, 2019 to September, 2020 for Fe62%-below Fe65% was INR 2,157/tonne (t) while that for Fe60-below Fe62% was INR 2,011/t.
The ASP declared by IBM includes a royalty of 15% on the base price. The price of minerals for each month gets adjusted accordingly. The miners also have to pay a steep premium on the IBM price, which varies, depending on the price they paid at the auctions.
However, if a miner blends to keep the grade lower at say even Fe 61.8%, it can save in terms of its royalty and premium payout since the grade lower than Fe63% commands a lower IBM price.
However, it is also currently a seller’s market where the prices of iron ore are at an all-time high and the miners are reaping the benefits. So saving a bit in terms of royalty or premium payout is not of much consequence to them.
So, another possible reason is the reigning high export prices for low grade fines and where the profitability lies. In short, this is an export prices-driven scenario. In the event of the exports market tapering off, iron ore prices will likely cool down to previous levels of $100/t internationally and ease the current situation. But, yes, till the prices are above $120/t range miners will be inclined not to supply to domestic customers, blend their ore with lower grade fines and export.
Fallout
A major fallout is that pellet makers are having to revise their grades. AM/NS India, for instance, is procuring fines of Fe63% from its Thakurani mines but is facing difficulty in getting the 63% required for its pellet plant in Paradip while buying from merchant miners in Odisha, since 62% is being offered at present.
Market sources said, consequently, AM/NS India now has to revise downward the pellet grade at its Paradip plant to 63-64% and sometimes even less. Earlier, it could produce pellets of Fe65% content from the 63-64% it procured from
Odisha miners. Production volume has been impacted too, which has decreased to 3-4 lakh tpa from the previous 4.5-5 lakh tpa. Sources informed that AMNS India has imported a few consignments of high grade iron ore concentrate of Fe66% from Australia and Brazil to blend with the Odisha ore to get the desired grade of pellets.
Godawari Power & Ispat is still offering the same spec of 63% (+/- 0.5%) for its pellets, essentially because 70% of its requirement is fulfilled by captive mines and it plans to continue with this trend.
Pellet makers in the eastern region, mainly Durgapur and Odisha, not particularly Raipur, have had to revise their spec because the quality of the ore they are procuring “is becoming poorer day by day”. They have no option but to revise their pellet grades. Going forward, the market thinks the grade might sustain at Fe62.50% (+/-0.5%) and not improve from here although the government is taking all possible steps to improve iron ore production.
Impact on steel mills
Will the mills’ production quality be impacted? Not really, because they have been raising their prices, which have escalated by 25-30% in the last few months and three times in December alone. Thus, losses incurred on account of poor quality of ore, is getting neutralised by the price hikes.
Moreover, for blast furnace players, the sintering plants can accept grades even as low as 58-59%.
Further, the mills will continue to put emphasis on captive production to get the requisite grade.
Export prices
But, is there a possibility of iron ore export prices cooling or an impending cap on its overseas sales?
Sources say there is no indication to that effect and that the market will continue to remain tight. Exports and international prices will stay robust at least till the next quarter because of high Chinese demand and restrictions in supply from Australia and Brazil.
Such a scenario would continue to pressure domestic users of iron ore from Odisha’s merchant miners.
“If China maintains its steel production level, iron ore prices will not come down,” said a source.
Indian miners, on their part, need to increase production but the market does not see levels returning to pre-Covid levels at least for the next six months despite government measures.
All the major mines are out of production and the market feels the Odisha government has to take strict decision regarding the same.
New benchmark?
So, is 62% the new benchmark price?
Globally it is 62% and this could become the new benchmark in India too. Higher Fe content is always better in terms of steel products and costs. But if the requisite quality is not available mills will adapt, said sources.
About SteelMint’s methodology for domestic iron ore assessments – SteelMint’s credible prices have been serving as a benchmark for manufacturers, buyers and traders in the steel industry to settle contracts or to understand the market cost of physical supply of commodities like iron ore. To read the detailed methodology, please click here
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