How is Karnataka's iron ore industry shaping up post Supreme Court verdict?

• E-auction sales volumes remain low despite gradual recovery
  
  
• Prices drop sharply on SC order, export duty impact
  
  
• Output enhancement not likely before end of next quarter
  
  

Iron ore production and sales in Karnataka are in a state of flux since the Supreme Court, in a landmark verdict on 20 May, lifted curbs on exports and eased sales restrictions from Bellary, Chitradurga and Tumkur districts in the state.

Setting aside its 2011 order of direct disposal of the accumulated iron ore through the process of e-auction conducted by the Central Enforcing Agency (CEC)-appointed Monitoring Committee, the apex court ruled that direct contract sales and/or spot sales would henceforth be allowed.

Iron ore e-auction sales in Karnataka dropped to their lowest level in over two years to a little under 1 million tonnes (mnt) in June due to the confusion over sales and dispatches following the Supreme Court's verdict.

Despite the court order, and prior to the issuance of the interim guidelines by the state government, market participants were unsure of the modalities of iron ore evacuation and dispatch, which resulted in a deadlock situation where the mineral for which confirmed orders had been received and advance payments made was not allowed to be lifted for want of requisite permission from the state government.

However, sales also edged lower as the market went into a tailspin after the imposition of export duty on steel and steelmaking raw materials.

Output cap lifted

In a significant recent development, the Supreme Court raised the iron ore production ceiling in the state from 35 mnt to 50 mnt from the A and B category mines. The production cap in Bellary was raised to 35 mnt from 28 mnt, while in Chitradurga the ceiling was raised to 15 mnt from the erstwhile 7 mnt.

As per SteelMint data, Karnataka was the second-largest iron ore producing state in India with over 40 mnt of output recorded in FY'22.

The apex court had lifted the five-year-old ceiling on production from 30 mnt to 35 mnt for the A and B category mines in 2018. There was no cap on the C category mines or mines that were subsequently auctioned in the state.

Sales scenario

Iron ore sales in Karnataka seem to have gradually recovered over the past couple of months, SteelMint data shows. There are private miners who have shifted to open sales. Sales dropped in May and June following the Supreme Court's verdict.

As per latest data, iron ore sales in e-auctions in August rose to 1.2 million tonnes (mnt). NMDC, KSMCL and Vedanta were the leading suppliers. That apart, direct sales were also reported by miners such as MSPL and Chowgule & Co., although the volumes are yet to be verified.

SteelMint data shows that while sales volumes at e-auctions averaged around 1.5 mnt per month over the last few months, open sales by private miners were around 200,000 t. It is, therefore, evident that sales volumes remain lower than the average 3 mnt recorded in the period before the SC order.

Price picture

It is to be noted that the country's leading iron ore miner, NMDC, increased the base prices for iron ore fines by up to INR 105/t and for lumps by up to INR 200/t for the auction from the Donimalai mines on 12 August last.

Prices mentioned are excluding royalty, DMF & NMET

Iron ore prices in the state, based on SteelMint's calculation of movements in e-auctions, have dropped over 45% since the SC order. This is, however, largely because of the export duty impact that affected steel market sentiments and iron ore and pellet prices due to the apprehension of surplus domestic availability.

However, due to low sales pellet prices in Bellary edged higher through July and August on low iron ore inventory with producers. However, with the gradual easing of supplies and higher availability prices have corrected to around INR 9,000/t exw-Bellary from INR 10,000/t in mid-August.

Export duty

It deserves mention that immediately after the SC's landmark verdict that lifted all restrictions of iron ore exports from Karnataka, the government imposed export tariffs of 50% on all grades of iron ore and a prohibitive 45% on pellets.

Naturally, therefore, exports are not taking place from India at present save very small volumes by the export-dependent mills. The market is waiting with bated breath for any government change of stance on this issue.

Production to rise

With the cap on production lifted, it is expected that Karnataka's iron ore in Karnataka output will rise further in the coming months. For instance, NMDC's Kumaraswamy mine is due for extension of lease in October. Run of mine (ROM) iron ore production capacity of the mine has been proposed to be increased to 10 mnt/year from 7 mnt at present, with the setting up of a second screening plant at the site.

Likewise, other miners in the state such as Vedanta are expected to ramp up production in the coming days. Market sources are of the view that the lifting of the output ceiling augurs well for iron ore production in the state. It is hoped that buyers in the state will now be able to source material from local miners, with sourcing from other states such as Odisha expected to fall.

According to SteelMint estimates, however, enhanced volumes are expected to come in from the end of the next quarter.

SteelMint is conducting a field visit to iron ore mines in Karnataka in mid-October in order to gauge the scenario from up close and monitor the changing dynamics of the mining industry in the state. Make sure you sign in for the trip if you are keen to assess the ground reality as well as grasp the emerging trends that are likely to shape the industry. For more details reach out to us on +91 86022 70907