India: Karnataka iron ore sales plunge 43% in Apr-Sep'22

• Lack of clarity post-Supreme Court order impacts sales
  
  
• Monsoon dampens production and offtake
  
  
• Share of direct sales may increase in future
  
  

Morning Brief: Karnataka's iron ore sales in April-September, 2022 or the first half (H1) of the current financial year of 2022-23 (H1FY23) dropped by a sharp 43% to 8.9 million tonnes (mnt) (including an estimated amount of direct sales) against 15.70 mnt seen in the same period of H1FY22.

However, on a m-o-m basis, e-auction sales in September, 2022 rebounded by 42% to around 1.7 mnt versus 1.2 mnt in August on the back of improved restocking due to expectation of higher steel prices in October.

It may be mentioned that Karnataka was the second-largest iron ore producing state in India with over 40 mnt of production recorded in FY22.

Main reasons behind drop in H1 sales

• Monsoons impact output: The rains impacted production, which led to some shortage of the material. In fact, the state's iron ore production in H1FY23 fell 28% to 14.45 mnt against 20 mnt in H1FY22, sharply impacted by the monsoon.
  
  

• Less clarity on sales after SC order: There was less clarity on sales patterns post-the Supreme Court (SC) order, and hence sponge players shifted to pellets. It may be recalled that the apex court, in a landmark verdict in May, 2022, lifted curbs on exports and eased sales restrictions from Bellary, Chitradurga and Tumkur districts in Karnataka. Setting aside its 2011 order of direct disposal of the accumulated iron ore through the process of e-auction conducted by the Central Empowered Committee (CEC)-appointed Monitoring Committee, the apex court ruled that direct contract sales and/or spot sales would henceforth be allowed. But, post-order, there has been some confusion regarding the sales of iron ore in Karnataka. In fact, iron ore e-auction sales in Karnataka dropped to their lowest level in over two years to a little under 1 mnt in June due to confusion over sales and dispatches following the SC verdict.
  
  

Sales also edged lower as the market went into a tailspin after the imposition of the export duty on steel and steelmaking raw materials from the third week of May.

• Logistics confusion: In another and recent significant 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.
  
  

But market participants were unsure of the modalities of iron ore evacuation and dispatches, which resulted in a deadlock where confirmed orders had been received and advance payments made but the iron ore had not been allowed to be lifted for want of requisite permission from the state government.

Importantly, transportation of ore via roads was also an issue due to the rains.

Key miners in Karnataka

There are three major iron ore miners in this southern state. These include NMDC Kumaraswamy and NMDC Donimalai (with a leading 35% share each in the September auction sales), Vedanta (29%) and R. Praveen Chandra (1%). Together, they sold around 1.71 mnt in September.

Outlook

In H2FY23, we may see the share of direct sales increasing as miners are trying to engage with buyers directly. With no Monitoring Committee in place now, all auctions are taking place via the MSTC platform and direct sales. However, currently, auction sales volumes of MSTC continue to be higher compared to direct sales. It was also heard that some buyers were looking to negotiate long term contracts with miners.

Iron ore prices too seem to have bottomed out and there is less scope of price correction from here since steel prices may have bottomed out. Lumps (Fe63%) prices, from a peak of INR 4,800/tonne in May 2022, dropped to as low as INR 2,550/t in July, upped to INR 3,500/t in September. Fines (Fe60%), from a peak of INR 3,840/t in April this year, plunged to INR 1,950/t in July but recouped to INR 2,700/t last month.