India’s merchant pellet production may drop by 10-15% in FY’23

• Exports just about 14-15% of total production
• Majority of pellet consumption is by captive producers
• Merchant mills to be the worst hit
• Duty to impact industry’s capacity utilisation

Morning Brief: The Indian government has recently imposed a steep 45% export duty on iron ore pellets from none previously with the objective to control inflation and soaring steel prices and to ensure higher availability for the domestic industry.

The Union Ministry of Finance has also announced that 50% duty will henceforth be levied on exports of iron ore of all grades from 30% previously only for iron ore of Fe58% and above grades.

Market sources are of the view that the announcement of prohibitively steep export duties on steelmaking raw materials signals the government’s intent to curb exports, facilitate higher domestic supplies and control prices.

But is retail inflation a direct fallout of exports? For instance, are India’s pellet exports exerting inflationary pressure on the domestic market?

Production & exports

India’s pellet production capacity currently stands at around 110 million tonnes (mnt). Rapid expansion in steel production capacity has resulted in the sharp increase in pellet capacity: in 2021 alone, over 70 mnt of new capacity was accorded government approvals in the form of environment clearance (EC) as well as content to establish (CTE), month-wise data maintained with SteelMint reveal.

Pellet production in FY’22 was around 77 mnt. The industry’s capacity utilization level is 70%. On average, out of total production, 66 mnt is domestically consumed, which leaves 11 mnt for exports. India’s total pellet production is expected to increase in FY’23 on the back of ramp up in capacities and an expected rise in iron ore production. However, the share of merchant pellet production (estimated at around 30-33mnt) is likely to come down by 10-15% y-o-y.

In FY’22, the country’s pellet exports fell to 11 mnt from over 13 mnt in the previous fiscal, although production increased by over 10 mnt y-o-y. Domestic price realisations remained higher than exports last fiscal, which accounted for the fact that the share of exports in the country’s total output fell to 14% in the preceding fiscal from over 20% in FY’21.

India’s pellet exports increased since 2015-2016 – mainly on higher Chinese demand – following global supply disruption due to an environmental disaster in Brazil. However, supplies are slowly limping back to normalcy. Moreover, steel production curbs in China mean that long-term export potential for India is not that bright. Moreover, China is expected to focus more on sourcing of domestic pellets.

Around 80% of India’s pellet exports were directed to China last year and the COVID-induced lockdown restrictions in China impacted demand for Indian cargoes. Weak downstream demand has affected steel margins in China and demand for high-value feedstock for steelmaking is weak at present due to low steel margins in that country.

Share of captive consumption higher

The integrated steel plants in the country are the major producers and captive consumers of pellets. All the primary steel producers are in leading positions when it comes to pellet-making capacity. JSW Steel (including Monnet & Bhushan) tops the list with 27 mnt followed by AM/NS India with 20 mnt, JSPL with 10 mnt  Tata Steel has a capacity of around 7 mnt.

The integrated steel plants are ramping up pellet production for captive use with increasing steelmaking capacities. In fact, the merchant producers are likely to be the worst hit with the hefty tariff being imposed on pellet exports.

Moreover, due to logistical bottlenecks, the merchant pellet markets are highly localized and clustered around manufacturing facilities. Therefore, if exports become unviable, the scope for merchant producers to expand their markets narrows down considerably.

Outlook

Thus, after exports become unviable due to the tariff imposition, it can be assumed that the country will have surplus pellet capacity. Market sources told SteelMint that capacity utilization of domestic producers is likely to come down.

Also, of course, new capacities that were expected to start operations in some time will get considerably delayed due to depressed pellet prices in the domestic market.

Furthermore, producers that were overly reliant on the export market will be left with little choice but to cut production significantly. Going forward, more and more pellet plants opting for maintenance shutdown is likely to become increasingly common.

The export tariff, therefore, is expected to have a deflationary impact on the market. Sources informed SteelMint that pellet prices in the domestic market fell by INR 1,100/t following the announcement of the new duty structure, as market participants are still assessing its impact before floating fresh offers and bids.