India's pellet production rises by about 6%, m-o-m, in Oct'21

India's pellet production increased by around 6% in Oct'21 to 5.65 million tonnes (mn t) from 5.33 mn t in Sept, as per data maintained with SteelMint. Pellet production volumes rose in Oct compared to Aug output of around 5.45 mn t, data shows.

With over 1.5 mn t of output, Odisha was the leader among key pellet producing states of the country in Oct, followed by Karnataka with 1.25 mn t and Chhattisgarh and Andhra Pradesh with over 600,000 t each.

India's pellet capacity is nearly 110 mn t per annum and total production in 2020 was more than 65 mn t.

Iron ore production drops

One key reason pellet production remained below the usual average of 6 mn t per month in Aug-Sep was that iron ore production remained quite low due to an extended monsoon. Production fell to around 18 mn t in Aug from around 20.7 mn t in Jul. Again, the country's iron ore production fell by over 15%, m-o-m, to 15.5 mn t in Sep, as per SteelMint data.

Notably, production in India's key iron ore producing state of Odisha stood at just about 7.4 mn t in Sep - a sharp fall of over 30% from 10.7 mn t in Aug. Beyond seasonal factors affecting mining and despatches, expiry of a couple of leading merchant iron ore leases in Odisha also weighed on output to an extent.

In addition, the state government slapped demand notices on lessees that failed to meet the MDPA despatch targets from the mines auctioned in 2020. The disposal of iron ore inventory lying at these mines was allowed on condition of payment of penalty for not fulfilling MDPA requirements. Therefore, this inventory also was not available in the market.

The Orissa High Court has given a month's time to owners of these auctioned mines to clear out the mineral inventory, latest by mid Dec.

In terms of yield, mills prefer iron pellets to iron ore lumps during the rainy season due to the presence of a greater amount of fines in iron ore lumps. And with pellet prices becoming competitive vis-a-vis lumps, it is expected that pellet sourcing could increase.

SteelMint data shows that capacity utilisation of many pellet producers declined due to high iron ore lump prices on relatively low availability compared to fines. However, producers with captive sourcing of iron ore are immune to such price and supply pressures and their raw material sourcing patterns don't reveal any marked volatility, as per data.

Thus, mainly the captive producers increased their pellet output in Oct after the seasonally weak Q2 of the financial year.

Exports fall sharply

Another key factor that impacted domestic pellet production was weak exports sentiments, also affecting the merchant producers more than the captive ones due to the greater exposure of the former to the export market. SteelMint data shows total exports at merely 240,000 t in Oct compared to 470,000 t in Sep - a drop of 48% on the month.

Export shipments totalled 2.21 mn t in Q2FY'22, as per SteelMint data. Shipments fell by 39%, y-o-y versus 3.62 mn t in the same period last year. The drop in export shipments was mainly due to falling export realisations resulting from the loss in China's buying appetite.

Steel mills in China are required to abide by government policy of restricting steel production to less than 1.065 billion tonnes in 2021. In order not to exceed 2020 production levels, Chinese mills are curbing production to offset the 12% rise in output in H1CY'21. Crude steel production in Oct plunged 21%, y-o-y.

India exported more than 13 mn t of pellets in FY'21 and SteelMint data reveals that domestic consumption was around 47 mn t, of which captive consumption had a significant share. Total exports till Oct this year have reached nearly 10 mn t.

Prices under pressure

Domestic pellet prices in Oct dropped steadily as imported coal prices fell sharply and sponge iron prices corrected lower. Falling export sentiments contributed to the decline in prices further in Nov. SteelMint's bi-weekly pellet index, PELLEX, plunged to INR 10,900/t DAP Raipur in the third week of Nov from around INR 14,000/t in mid Oct.

Subdued export sentiments and domestic prices took a toll on production and a few export-oriented mills in eastern as well as southern India took routine maintenance and repair shutdowns. This further affected domestic production volumes.

Major state-owned pellet exporter KIOCL had also been under such a shutdown in Oct and the news of resumption of production by the Karnataka-based company has arrived in Nov.

Will export demand recover?

Iron ore supplies are set to increase in the coming days with commencement of production from the brownfield leases auctioned in Odisha in Aug-Sep this year. Steel major JSPL will start mining at the Kasia iron ore block shortly, as per latest reports. Just 17 km from JSPL's pellet plant in Barbil, the mine has reserves of 278 mn t of iron ore.

Overall production volumes are expected to grow in Q3 and Q4FY'22 compared to the seasonally weaker Q2. Besides, disposal of inventory from the auctioned mines will increase supplies in the market. However, increasing supplies could weigh on domestic pellet prices, thereby extending the bearish spell in the market.

Domestic prices may hinge on sentiments in the export market and may rebound if demand recovers in China. The restrictions on iron ore sintering in China and preference for domestic pellets resulted in imports falling rapidly. Strict production measures are in place during the winter season and in the run up to the Winter Olympics in Feb'22.

However, market watchers are also predicting a surge in China's steel production from Jan'22 after the 2021reduced output target is achieved in Dec. Although restrictions will remain in place in various regions of the country till Mar'22, steel output is likely to recover from Jan onwards. This may create a window of opportunity for Indian exporters.