Indian buyers defer iron ore lifting on growing price uncertainty

• Consumers slow down material lifting as steel prices correct
  
  
• OMC says material lifting happening slowly
  
  
• Further drop in iron ore prices likely
  
  

In an indication of the sharp fall in the domestic steel raw materials market after the recent export duty revision, many buyers who had booked iron ore from different miners have slowed down lifting of material, SteelMint learnt from sources.

Market chatter is that buyers who booked material at Odisha Mining Corporation's (OMC) latest e-auction on 19 May'22 have lowered their material lifting quantities.

In OMC's iron ore fines and lump auction on 19 May, out of a total 2.11 million tonnes (mnt) of material on offer only 1.47 mnt - 936,000 t fines and 538,000 t lumps - received bids.

Pellet producers have reportedly lowered lifting of material bought in the auction. Out of over 900,000 t of fines sold only about 200,000 t has been lifted so far, sources informed SteelMint. However, sources in the OMC confirmed that lifting of material is happening, although at a slower-than-usual pace.

It is being assumed by industry sources that buyers may cite a force majeure clause post the overnight announcement of the steep export duties on iron ore and pellets and submit letters to the miners to that effect.

Bid prices in OMC's fines auction had fallen by INR 1,650/t compared to the bid prices in last month's auction. However, market activity now has come to a standstill after the duty revision and buyers expect a sharper fall in domestic iron ore fines prices in the near term.

In conversation with traders based in eastern India SteelMint learnt that order bookings of a few more Odisha-based miners are facing similar issues with buyers unwilling to lift the booked quantities.

As per latest updates, SAIL's auction for 40,000 t of iron ore dump fines (Fe 59% indicative) from its Bolani iron ore mines in Odisha on 25 May didn't receive any response.

Material lifting & penalty clause

As per conditions laid out for bidders in OMC's auction notification, the delivery period is 40 days from the date of the contract. The earnest money deposit (EMD) is refunded after successful lifting of at least 80% of the auctioned/allotted quantity. The EMD is calculated at a rate of 4% of the respective grade floor price of the material per wet metric tonne.

However, if a buyer fails to lift 80% of the allotted quantity penalty is charged at 2% plus GST of the sale value of the quantity not lifted, calculated from the total quantity allotted. In case of extension of the supply period, the sale value (calculated at the higher price comparing the price at the time of allotment and the price prevailing at the time of extension) applicable during the extension period is considered for calculation of penalty.

However, sources say that many buyers are unwilling to lift material even at the cost of forfeiting the EMD deposited. Clearly, buyers are apprehending a rapid fall in steel prices due to surplus availability of iron ore and pellets in the domestic market.

Outlook

Around 14% of India's pellet production last fiscal was exported, so this material will become surplus if production remains stable, as exports with a tariff of 45% is clearly unviable.

SteelMint calculations show that with a tentative price idea of $155/t CFR China (for Fe63% Indian pellets) the ex-plant realisation will stand at around INR 4,300-4,400/t after factoring in the export duty. On the other hand, our domestic price assessment for pellets in Odisha's Barbil region towards the beginning of the week stood at INR 9,250/t loaded to wagon. Thus, export realisations will be much lower than in the domestic market.

Unsure of the market direction, merchant miners are holding offers currently. Nearly 25% of the material was left unsold at OMC's fines auction recently and demand is sinking. Therefore, OMC may have to lower the floor prices for its auction next month by a significant margin to attract participation.

The country's leading iron ore miner NMDC cut prices up to INR 750/t on 25 May. Fines prices have fallen by INR 750/t and DR-CLO prices by INR 720/t. Prices have edged down to a four-month low.

Similarly, SteelMint's Odisha iron ore fines (Fe62%) index dropped to a four-month low of INR 4,800/t exw on 21st May after OMC's auction. As the capacity utilisation of merchant pellet producers is sure to drop further in the coming days, it can be assumed that iron ore prices may edge down further.