India: What to expect in the upcoming OMC iron ore auctions?

Odisha Mining Corporation (OMC) is facing a dilemma as its long-term linkage (LTL) buyers, who comprise 70% of its customer base, are just not showing interest in its iron ore auctions. The last few auctions have been rather unexciting.

Information available with SteelMint reveals that among 19 of OMC's LTL buyers, as many as 11 have not lifted 50% of their allotted quantities from Jan-Sept'21. Only two have lifted around 90%, and the rest are ranging from 56-74%.

OMC's auctions are a price discovery mechanism even for its LTLs. However, these very auctions are setting a low price range.

In fact, OMC's latest auctions, held in end-Aug'21 for both fines and lumps, elicited a rather poor response. Lumps fetched bids for only 238,000 tonnes (t) out of a total of 765,000 t put to auction. The bids remained flat in line with the base price of the material. In fines, only 20,000 t got sold at the base price out of a total of 902,000 t on offer. The miner had earlier lowered the base prices across grades by up to INR 1,000/t compared to the previous auction on 23 Aug'21. At the earlier auction, too, OMC had received weak participation, with just 24,000 t of iron ore getting booked.

Market sources expect a reduction in the base price owing to the dull auctions response.

Why are buyers lifting less at OMC auctions?

• Global iron ore prices have corrected by around 50% because of lack of buying from China due to its production cuts. This, in turn, has reduced iron ore and pellet exports from India. On 15 Sept'21, SteelMint's India pellets exports index got eroded by $16/t w-o-w, falling to its lowest level in a year.
  
  
• China is India's biggest pellets importer but with its ongoing production cuts, demand is dwindling. Consequently, domestic availability of pellets has increased, pushing down domestic pellet prices. SteelMint's bi-weekly domestic pellet index lost ground by INR 2,700/t m-o-m to INR 11,100/t DAP Raipur.
  
  
• Global coking coal and met coke prices have risen, putting Chinese blast furnaces in a dilemma. They have been cutting down on iron ore purchases to reduce costs.
  
  

An industry source said: "The price disparity is leading to lack of interest in the auctions. Auction prices are high while pellets prices have dropped. So buyers would prefer pellets to iron ore. Or else, iron ore has to be offered cheaper."

Odisha policy

With more than one-third of India's iron ore reserves located in Odisha, the latter, to facilitate the development of mining-based industries, mandated that mining leases in the state are required to dispose of 50% of their mined ore for consumption by state-based industries. The state also approved the policy of long-term linkages of five years for iron ore and other minerals through OMC.

Outlook

Chinese steel production cuts, falling global iron ore prices, cheaper pellets options are factors here to stay for some more time. Thus, OMC may see subdued demand for its auctioned ore in the near term and may have to lower its base prices to lure buyers in the upcoming auctions, which have become monthly from the previous bi-monthly affairs.