India: SC lifts ban on iron ore exports from Karnataka; will it impact export volumes?

• Ban on exports of iron ore and pellets from Karnataka lifted after 10 years
  
  
• State has inventories of around 8-10 mnt of which old stocks would be 4-5 mnt
  
  
• Export volumes may not increase significantly owing to production cap (35mnt) in the state
  
  

In a crucial development for India's iron ore industry, the Supreme Court on 20 May'22 lifted curbs on exports of iron ore from Karnataka and eased all restrictions on sales of iron ore from the districts of Bellary, Chitradurga and Tumkur where mining activity had been prohibited following rampant encroachment in forest land by mining companies and illegal mining in 2011.

Karnataka was the second-largest iron ore producing state in India with over 40 mnt of production recorded in FY'22.

The landmark court order read: ""There needs to be a level playing field for the mines in Bellary, Chitradurga, and Tumakuru of Karnataka... While the restrictions imposed on mining back in 2011 worked out well for most part, the situation has now changed."

It further noted: "We permit to sell already excavated iron ore stock in the three Karnataka districts. Permission also granted to allocate iron ore by entering into direct contracts without resorting to e-auction."

The apex court had reserved its order on the issue of lifting the ban on exports of iron ore from Karnataka in Apr'22. The proposed lifting of the ban was supported by the Union Ministries of Mines and Steel.

Backdrop

Overturning 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 has ruled that direct contract sales and/or spot sales will replace e-auction.

The e-auction process, meant to help bring transparency besides fetching the right value for the proposed mines, restricted participation in the form of allowing only end users located in and around Karnataka to participate in the bids, which reduced competition, thereby defeating the entire objective of fair price discovery.

Market sources told SteelMint that this created the opportunity for certain big steel producers to corner a huge share of the material at e-auctions.

As for the ceiling on production and mining limit, the court has sought recommendations from the committee overseeing the issue. The case will be heard next in Jul after the court's summer vacation.

Cap on output

The apex court had lifted the five-year-old ceiling on production from 30 million tonnes (mnt) to 35 mnt for A and B category mines in 2018.

The Central Empowered Committee of the Supreme Court had categorised 166 mining leases into A, B and C as per the extent of illegalities committed by them. Category A comprised 45 mines that had negligible or no illegalities. Under category B were 72 mines where pits were found outside the lease area and 51 category C mines were operations had stretched beyond the lease boundary by more than 15%.

Will exports volumes be impressive?

The SC order comes at a time when iron ore production from Karnataka has increased manifold over the years. SteelMint data shows that production in Karnataka increased from under 30 mnt in FY'19 to over 40 mnt in FY'22.

Notably, India's exports of iron ore and pellets before the SC ban were much higher at around 100 mnt in 2009, as per SteelMint data.

But, even as production from Karnataka, including merchant and captive, has breached the 40 mnt level, consumption of iron ore by the state's steel industry ranges between 38-40 mnt leaving little scope for exports.

Exports of iron ore with ferrous content 58% & above attract 30% duty. It is safe to assume, therefore, that low-grade iron ore fines exports from Karnataka would likely stay low given robust domestic demand with the existing cap on production remaining in place.

Exports from Bellary miners may not rise sharply due to surging domestic consumption. Pellet exports may remain marginal due to the fact that most of the pellet plants in the state are captive. Notably, iron pellet export is still outside the purview of export duty.

However, SteelMint assumes that there is the possibility of a momentary spurt in exports in the short term due to the pressing need to sell off already evacuated iron ore.

Sources informed SteelMint that iron ore inventory in Karnataka is currently around 8-10 mnt, with stocks of fresh ore estimated at around 5 mnt.

It is important to note that Karnataka iron ore prices usually remain depressed compared with Odisha prices due to the restrictions on sale and exports. However, the scenario is expected to change, going forward, with the embargo on exports being lifted.

However, it is also important to note that global iron ore sentiments are yet to pick up as China's lockdowns continue to weigh on demand. SteelMint assesses low-grade Fe57% iron ore export prices at $46/t FOB India - around INR 3,600/t - down almost 25% m-o-m.

For Karnataka miners, export prospects, in the near term at least, don't seem to be too bright.