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Iron ore prices to continue to take cues from China

The iron ore industry in India is in pink of health as the 2021-22 first quarter impressive results of the country’s the largest ore producer, NMDC, will bear out. No doubt, the company’s 35% rise in ore production to 8.91 million tonne during April to June on a year-on-year (y-o-y) basis and a 51% spurt in sales to 9.45 million tonne made their contribution to the astounding three-month working.

But what really made it possible for NMDC to register a 499% rise in post-tax profit to Rs 3,193 crore from Rs 533 crore in the same period last year was to benefit from very high prices the steel making ingredient commanded during Q1. In fact, in the world market, the benchmark grade ore with iron content of 62% commanded a record price of $231 a tonne on May 12.

Indian ore prices take their cue from globally traded rates. At the same time, as the very major part of India’s ore production is used within the country, the demand from local steelmakers is the overriding factor influencing prices. For example, during 2020-21, of ore production of 203.92 million tonne, 57.22 million tonne were exported and the rest was either locally processed or left in inventory.

While this be so, world prices did skid around 40% from May high because of a number of considerations, the most important being how far China will go to restrain steel industry production in this year’s second half, in line with its decarbonisation drive. With softness prevailing in global ore market, NMDC had occasions to cut its prices.

NMDC chairman Sumit Deb puts his faith in continuing good working by Indian steel companies, their expansion programmes to result in incremental ore demand and the country focus on execution of infrastructure projects that will require more and more steel. How NMDC will be faring in the remaining quarters of 2021-22 cannot but be influenced ore prices behaviour in the world market, which in turn will be based on Chinese imports.

Why is China of critical importance to ore prices? The answer lies in that country’s share of 56.5% in global steel production of 1.864 billion tonne in 2020 when it accounted for 56.2% of world steel consumption. The combination of poor quality of its own ore resources, high cost of mining that and washing to improve ore quality and the significant carbon footprint left in the whole process give China no alternative to large imports to run its mammoth steel industry, which produced 1.053 billion tonne of crude steel last year.

This happened in spite of the country’s National Development and Reforms Commission (NDRC) and ministry of industry information technology (MIIT) decision to continue to identify outdated and environmentally unfriendly steelmaking capacity for elimination. The objective is to put the industry on track to pursue quality improvement instead of building new capacity. In the last six years, China has dismantled at least 150 million tonne of steel capacity.

An Odisha based iron ore producer-exporter says: “No doubt, miners here are a major beneficiary as China stepped up ore imports in line with its crude steel production rising from 803.8 million tonne in 2015 to 1.053 billion tonne in 2020. Australia has a share of over 60% of Chinese imports. But as political differences with Canberra are growing and also in pursuance of a well thought out strategy to step up buying from other ore producing countries, we could step up our exports to 44 million tonne to China in 2020 from 23.8 million tonne in 2019. Remember, almost two-thirds of our exports to China had less than 58% iron content for which there is very little domestic demand.”
Incidentally, China imported 1.17 billion tonnes of ore in 2020, ahead of the earlier record of 1.075 billion tonne in 2017. What is, however, noticeable is that since March when Chinese imports were 102.1 million tonne, every month since its imports were below 100 million tonnes.

Compulsion to rein in steel production to combat pollution – steel alone has a share of over 15% of the country’s total carbon emissions – and attempts to disprove that China is in the business of dumping its surplus ferrous metal on the world market, Beijing remains at disciplining the industry. In fact, Chinese steel exports may drop further this year following imposition of higher tariffs on foreign shipments. Last year, steel exports were down 16.5% y-o-y to 53.671 million tonne whereas imports at 20.23 million tonnes were up 64.4% on 2019.

Trade officials have also taken note of the likelihood of the US Federal Reserve and central banks in many other countries, including China winding down strong stimulus programmes that lent bullishness to industrial commodities
in general.
Source: Financial Express

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