Analysis: Indian Iron ore supplies to remain tight in short to medium term

The Odisha government beat market expectations with its efficient and timely auction of working iron ore mines lapsing on 31 March 2020. The transition foretold under the new MMDR 2015 however, did throw up some unexpected surprises -- in the high premiums, ranging from 91-154% committed by players.

SteelMint believes such unviable premiums will eventually determine the success of mineral auctions and justify a call for review of the current auction methodology. Meanwhile, here is our short- and medium-term outlook of the Indian iron ore.

Indian iron ore production may fall by~20% and demand by ~12% in FY21, SteelMint estimates

• We expect Indian iron production to fall by ~20% in FY21 owing to lower steel demand this year coupled with the fact that several new lessees in Odisha are unlikely to start operations.
  
  
• We estimate Indian iron ore demand to be around 170-175 mnt in FY21 against 195-200 mnt in FY20.
  
  

Odisha: Production lagging behind

• The Odisha government "successfully"auctioned16 iron ore mines earlier this year. The auctions saw active and aggressive participation from the industry fetching premiums as high as 150%.
  
  

• However, as on Sep'20 only 7, of the 16 mines auctioned, have been able to start production. 2 bidders are unlikely to sign leases and 3 auctioned mines are subject of legal dispute.
  
  
• There is an increment of ~5 mnt from non-auctioned mines in the first six months of FY21. We do not expect these mines to add significant additional supplies to the market this year.
  
  Status of auctioned Iron ore mines in Odisha
  
  

*80% of the average production of the preceding two years

Odisha: Will supplies improve or shrink post 31st October?

• The deadline for old lessees to lift their stocks ends on 31st October 2020. The stocks will then be confiscated by the state government and auctioned through the state mining company, Odisha Mining Corporation (OMC). However, few sources have reported that some mines may get an extension till 31 Jan'20.
  
  
• According to Odisha government data an estimated 28 mnt would be available with old lessees at the end of Sep2020. We expect stock levels to be around 15-20 mnt as on 31st October 2020.
  
  
• SteelMint estimates most of these stocks to be of low grade (below 58%) ore and to be difficult to liquidate.
  
  
• The new lessees will certainly be able to improve their dispatches after 31st Oct. However, it will be interesting to see if companies like JSW Steel and AM/NS offer their cargoes in the merchant market in the short to medium term.
  
  
• We expect supplies to remain tight in the short term.
  Odisha supply-demand dynamics - Lets do the maths again We expect a shortfall of ~6 mnt iron ore in FY21 against FY20 in the state of Odisha. However, FY20 can not be taken as a benchmark for iron ore production, because miners ramped up productions before the expiry of their respective leases.*Supreme Court allowed Sarda Mines which was closed since 2014to start production in Jan'20. The company produced 5.5 mnt in Feb and Mar'20. Company has an EC limit of 6 mnt.
  *Supreme court allowed JSPL to liquidate their 12 mnt inventories lying at Sarda mines after 6 yrs. We expect 8 mnt of this inventory to be used this year by JSPL.
  *Government of India allowed Steel Authority of India (SAIL) to sell 25% of their annual iron ore production in the merchant market.
  *Additional supplies from non-auctioned mines like OMC, Rungta, DR Patnaik. 

  What SteelMint expects in short to medium term?
  
  

• Iron ore supplies to remain tight, particularly of lumps
  
  
• Iron ore and pellet prices to remain high
  
  

• Iron ore and pellet exports may fall in the coming months on higher domestic realizations.
  
  
• There is a scope of imports but we do not see this exceeding 3-5 mnt in FY21. AM/NS is reported to have booked around 1 mnt iron ore and pellets in the last couple of months. Few coast-based DRI plants are also expected to import lumps.
  
  
• Scrap imports may gain traction over higher DRI prices.Key events to look out for-:
  
  
• Resumption of NMDC's Donimalai (Karnataka) mines in Dec. The mine, shut since 2018, has an EC limit of 6 mnt.
  
  
• AM/NS to operationalise their Ghoraburhani mines (virgin block) in Dec'20. This mine has an EC limit of 7 mnt.
  
  
• Resumption of operations at Serajuddin's Balda iron ore mines which has an EC limit of 15.5 mnt and produced around 12-13 mnt last year.