Indian iron ore prices may witness a correction in Dec'21. Know why?

Indian iron ore prices are most likely to witness a correction in Dec'21, SteelMint understands.

SteelMint's Odisha iron ore fines (Fe 63%) index fell by INR 400/t on 27 Nov'21 to INR 5,600/t ex-mines. The index has dropped by over 40% compared to Jun-Jul and by around 7% from the beginning of Oct.

Likewise, the Odisha iron ore lump (Fe 63%) index has fallen to INR 9,500/t, a decrease of over 30% from levels of INR 14,000/t in Q1FY'22 and above INR 10,000/t in Oct. Leading miners in India's key iron ore production hub of Odisha have reduced offers recently by INR 400-500/t.

• Inventory liquidation: Domestic iron ore prices have come under pressure due to a combination of factors. To start with, additional supplies are expected to pour into the market with the expired leases auctioned in 2020 in Odisha being allowed to liquidate inventory.The Orissa High Court has granted a month's time, starting 15 Nov, to the ex-lessees to dispose mineral inventory. According to sources, the interim order will benefit many lessees. Although a month's time is not sufficient for some miners to liquidate their total inventory, and some companies have even moved court seeking further time, additional supplies have started coming in with some miners renewing offers.
  
  
• Production rebounds: India's iron ore production has rebounded in Oct after falling to around 15.7 million tonnes (mn t) in Sep from over 18 mn t in Aug on seasonal factors. Iron ore production in the Apr-Sep period stood at 120.82 mn t. Production recovered significantly compared to last year, with production from Odisha - India's largest iron ore producing state - increasing by 85% year-on-year. The country's iron ore output fell to around 204 mn t in FY'21 compared to more than 245 mn t in FY'20.
  
  

Moreover, new production is about to commence at the operational leases that were auctioned in Odisha in Aug-Sep'21. JSPL has started operations at the Kasia iron ore block in Odisha which it won at the second round of Odisha mine auctions at a premium of 118.1%. The mine has total geological resources of 278.04 mn t of iron ore.

SteelMint data shows that Odisha recorded merchant iron ore despatches at 3.93 mn t in Oct, an increase of 16% on the month against 3.38 mn t in Sep. This figure excludes despatches from captive mines and movement for exports.

Supplies, therefore, are on the rise which could automatically pressure prices downwards.

• Sourcing from NMDC Chhattisgarh drops: Notably, iron ore lump prices are under pressure as pellet offers have become competitive for sponge iron producers due to a sharp decline in domestic pellet prices across markets. Leading PSU miner NMDC's total rake movements dropped to 334 in Nov (till 26 Nov) versus 385 in Oct, as per SteelMint data.SteelMint learnt from market sources that Chhattisgarh-based sponge producers have reduced sourcing from NMDC too. Although sourcing of iron ore-laden rakes from NMDC by Chhattisgarh-based units have inched up to 78 in Nov from 63 in the preceding month, many mid- and small-scale producers have scaled down iron ore sourcing.
  
  
• Competitive pellet offers impact lump prices: Domestic pellet prices slipped due to weakening sponge iron prices, following the sharp drop in coal import prices over the last one-and-a half months as well as deteriorating exports sentiments.
  SteelMint's bi-weekly domestic pellet (Fe 63%) index, PELLEX, has fallen to INR 10,350/t DAP Raipur, lower by INR 550/t against the last assessment of INR 10,900/t on 23 Nov.
  
  

The Raipur pellet index has slumped to these levels from INR 17,000/t in May and INR 13,800-14,000/t in mid Oct. While central India-based pellet producers are currently offering at INR 10,500-10,800/t exw, producers in Odisha and Karnataka have also cut offers.

As a result, sponge iron producers are likely to increase sourcing of pellets owing to a sharp fall in prices, which is simultaneously pressuring iron ore lump prices. This is because sponge iron producers have the option of switching to pellet-based DRI production instead of iron ore-based DRI depending on price swings in the market.

• Imports spurt on falling global prices: Domestic iron ore prices may head further south as imports have become viable on the back of a sharp correction in global iron ore prices. Rampant steel production cuts and power rationing in China starting from H2CY'21 drove down benchmark iron ore fines (Fe 62%) prices to below $100/t , CFR China from over $230/t in May.SteelMint's vessel data reveals that imports of iron ore lumps from South Africa have been recorded at over 600,000 t in Nov-Dec, which includes already shipped cargoes as well as material expected to arrive at ports.
  
  

Rapid decline in global prices in early Nov led to enquiries multiplying from Indian mills. More than 220,000 t of cargoes are set to arrive at ports in western India in the first week of Dec alone. Naturally, therefore, domestic prices are not finding any support whatsoever.

Outlook

Given the sudden rise in import volumes as well as sharp correction in pellet prices, it was expected that miners would reduce iron ore offers to boost sales. However, despite low trading volumes during the festive season of Oct and the first week of Nov, merchant miners held on to offers which led to a shrinking of trade volumes in Nov.

Nevertheless, SteelMint reported that miners in Odisha have started reducing offers of late, with the perception gaining ground that the country's leading iron ore miner NMDC will most likely reduce prices in the first week of Dec.

NMDC kept prices unchanged at INR 4,760/t for fines and INR 5,950/t for Baila lumps (prices on loaded basis excluding royalty and other statutory levies) for Nov sales.

As per SteelMint, market sources are expecting another round of reductions soon enough.