Iron ore shortage hits Indian steel, pellet sectors

Indian sponge iron and pellet producers are facing a shortage of iron ore and escalating prices of the raw material which may lead to shutdown of some facilities and sharply lower production at other units, said industry sources.

These producers have identified tight supply of iron ore from Odisha, India's largest ore producing state, as the key reason for the sharp increase in prices.

Odisha had auctioned 19 iron ore mines earlier this year, with winning bidders declared for all of these, but operations have not yet resumed in a majority of mines. Even mines that are operational, such as those owned by AMNS India and JSW Steel, are producing smaller quantities and for captive use.

Status of Odisha auctioned mines as on 22 Jul'20

*correction - status of Fomento mines from "no compliance yet, to be re-auctioned" to "matter pending in court and hence sub juidice"
Source: Govt of Odisha, PMAI, Sponge Associations, SteelMint

Mines that were not put up for auction in Odisha and remained operational are also producing at lower rates than they did in 2019. The most reliable source of iron ore in Odisha remains the unsold stocks of previous leaseholders of the 19 auctioned mines, which have to exhaust these stocks by Sept 30. But even these leaseholders are not releasing sufficient ores in the market as they want to maintain stocks to sell at even higher prices, said sources in the downstream sector.

Out of 90 mn t of production capacity auctioned, the proportionate dispatch per month should have been 4.2mt, but total dispatch by new leaseholders in July'20 has been only around 33,000t and even that was for captive use by steel mills, said the senior executive of a pellet producer. "Due to the demand-supply mismatch, iron ore prices have gone up by more than 40% in the last 15 days alone," the executive added.

SteelMint assessed the Odisha 63pc Fe fines price at INR 2,350/t on 1 August, up by 27% since late-June. Prices are inclusive of royalty, NMET and DMF contributions.

Units face closure

For mines that were not put up for auction, the legally-allowed production limit is 59.9 mtpa. But only around 16.2 mn t, was produced in Apr-Jun'20, according to data maintained with SteelMint.

Sponge iron producers across the country have reported sharp dip in iron ore availability over the last six months which have adversely affected their production, with some units on the verge of shutdown, said sponge iron industry sources.

Some pellet producers may have to shut operations completely if the current high ore prices and shortage of material extends beyond this month, said another pellet industry executive.

Producers seek government help

Downstream iron ore users are asking the Odisha government to strictly implement its pre-auction condition of new leaseholders producing at a minimum 80% of legally-permitted capacity. There should be immediate re-auctioning of the leases where the bidder has not deposited the requisite money, said these sources.

They have also sought government help to prod previous leaseholders of auctioned mines to speed up sale of iron ore in the open market.

There had been speculation last year on whether India will turn into a net importer of iron ore in 2020 due to the expiry of leases of the 19 Odisha mines in March 2020, though timely conclusion of the auction process had allayed talk of import spike. But with mining slow to resume in the newly-auctioned mines and a large proportion of ore capacity shifting from merchants to integrated mills, there is renewed concern on iron ore shortage in the country. It is unclear if the unusually high premium paid by new leaseholders is slowing the process of executing mining leases and starting production but the Odisha government does not have much short-term options of speeding up mining other than prod the lessees to complete formalities and start operations.

If production of iron ore does not pick up pace by mid-September when old stocks are nearing exhaustion, it could lead to severe distress for small downstream players since importing iron ore could be an expensive proposition in a global bull market for the raw material.

While it is possible that some mine owners may be controlling flow of iron ore into the open market to push prices higher, they have also been hobbled by lingering logistics concerns as localized lockdowns and social distancing-related restrictions remain in place across the country, affecting dispatches. For instance, Paradip and Gopalpur ports have put a cap on the number of iron ore-bearing trucks that can enter the port daily from each mine. Also, iron ore output seasonally slows in Odisha in the monsoon months.

Meanwhile, demand for iron ore is increasing at a fast clip as steel producers have ample domestic and export demand. With unlocking of restrictions proceeding despite the rise in Covid19 cases, demand for steel and iron ore is likely to gain further.