Indian mills eye stocks to tide over iron ore shortage

India's iron ore output is poised to post a sharp drop in the 2020-21 fiscal year starting 1 April, but it may not result in a significant spike in imports although domestic prices may increase.

Leases of 24 operational iron ore mines and hundreds of non-operational mines owned by merchant mining firms with a total output of 60mn t/yr, most of these in Odisha and Karnataka states, will expire on 31 March 2020. These expired leases will be auctioned by state governments. Usually the process takes 6-7 months and regulatory approvals take up to two years. Not a single mine has yet been sold although Odisha has put up 20 mines, including its largest iron ore deposit, up for auction.

Steel producers are banking on the availability of a significant volume of unsold iron ore inventories to bridge the supply deficit. Indian laws allow mining companies with expired leases a grace period of seven months to sell off their accumulated stocks at the mine site.

While there may be some increase in iron ore imports, modest demand growth in the steel sector amid India's deepening economic slowdown is already pressuring profit margins of most mills. This will potentially prevent producers from buying too much iron ore from overseas where prices are typically significantly higher than in domestic markets.

India's iron ore output is forecast to rise by 7pc in 2019-20 to 225mn t with demand around 213.4mn t, as mines with expiring leases step up output to increase their stocks, according to ratings agency Icra.

There is already 127mn t of iron ore stocks in Odisha and Jharkhand states as India has consistently produced more than it consumed over the past few years, said the Federation of Indian Mineral Industries. Some of these stocks have not been sold yet because of logistical hurdles, but mills may not mind paying additional amounts to buy these if domestic availability falls sharply.

Delhi is working on allowing new leaseholders of the 24 mines where leases are expiring to immediately start operations without requiring fresh regulatory approvals for two years. But no executive orders have been issued for this yet.

State-controlled Sail, which has the second-largest iron ore deposits in India, has been allowed to partially sell its captive iron ore output. These stocks could be around 25mn-40mn t and will possibly be sold through auctions.

Without fast-tracked regulatory approval for new leaseholders, there may be "some problems" for iron ore supplies, private-sector firm JSW Steel has said previously. JSW expects in such a scenario sales of existing iron ore stocks and Sail's iron ore auctions providing a buffer against a sharp fall in iron ore availability.

India's largest iron ore producer state-controlled NMDC could step up output to meet increased demand. NMDC is expected to start operations soon at its 7.5mn t/yr Donimalai iron ore mine in south India's Karnataka, which has been shut for over a year amid a royalty dispute. "NMDC needs to gear up for opportunities coming its way post-March 2020 and should work on an aggressive growth plan to meet the demand of domestic iron and steel industry," said NMDC chairman Baijendra Kumar.

A domestic iron ore shortage could also lead to more pellet sales in the domestic market, cutting export supplies, said a research report by brokerage firm Acuite. "Iron ore pellet production in India will reach 68mn-73mn t 2019-20 and around 85pc of it is likely to be available to domestic sponge and steel units," said Acuite.

Exports of iron ore fines may not be affected as much, as India imposes a tax of 30pc on 58pc Fe and higher grades of fines and lump. This effectively has halted their exports over the past several years, while low-grade fines are not widely used by Indian mills because of a lack of beneficiation facilities and are mostly exported to China from east coast ports. Any fall in exports of low-grade fines because of domestic supply shortages are likely to be marginal.

By Prasenjit Bhattacharya