India: Karnataka iron ore e-auction sales drop nearly 30% in 2022

• Buyers-sellers still prefer the auction route
• Confusion prevails over pricing
• Long-term sales contracts being explored by miners

Iron ore sales in Karnataka dropped 27% y-o-y in 2022, SteelMint data shows. Sales (including estimated direct sales) stood at 22.6 million tonnes (mnt) in CY22 against 30.9 mnt last year.

Meanwhile, in December 2022, the total quantity booked rose 36% to 2.18 mnt against 1.6 mnt in November. The key sellers were NMDC (1.09 mnt), KSMCL (285,000 t), JSW (180,000 t) and Vedanta (100,000 t). The weighted average fines price in December rose by INR 350/t against November’s INR 2,050/t.

Reasons behind drop in volumes

• Less clarity post SC order: There is still confusion relating to various aspects of sales and pricing. In fact, iron ore e-auction sales in Karnataka dropped to their lowest level in over two years to a little under 1 mnt in June due to confusion over sales and dispatches following the SC verdict. As of now, majority of the players are preferring the auction route. It may be recalled the apex court, in a key judgment in May, had lifted the ban on iron ore exports from mines in Bellary, Chitradurg and Tumkur districts in Karnataka, paving the way for direct sales. Setting aside its 2011 order of disposal of the accumulated iron ore through the process of e-auction conducted by the Central Empowered Committee (CEC)-appointed Monitoring Committee, the apex court ruled in May that direct contract sales and/or spot sales would henceforth be allowed.
• Disparity in IBM & current prices due to delay: Post SC order, there is still no clarity on whether royalty, DMF and NMET contributions should be made together. While some miners are quoting the base price inclusive of royalty, DMF and NMET, others are excluding all three.

Secondly, since IBM’s average sale prices are issued after a delay of 2-3 months, miners are left to their devices to discover and sell at a certain price each month and then adjust accordingly.

Production

Karnataka’s iron ore production volumes have fallen by almost 8% y-o-y in January-December 2022 to 35.15 mnt against 38.35 in January-December 2021. However, the fall in production is lower compared to sales and this is largely due to improved production from the captive C category auctioned mines.

Outlook

Buyers and sellers told SteelMint that they have been working on the auction model for years and that switching to direct sales is difficult, especially given the lack of clarity following the Supreme Court order. The majority of miners continue to follow the auction route. “The auctions have a high comfort factor. It’s a transparent mechanism,” a source said.

However, in the long run, market participants are expected to explore the long-term agreement (LTA) mode too. SteelMint heard that some large miners are in the process of connecting with the key mills for LTAs for direct sales in the future.

Iron ore and pellet exports from Karnataka are also expected to pick up after the withdrawal of export duties on steelmaking raw materials.