Iron ore production in Karnataka may drop 10% in FY23 but outlook largely positive

• FY23 production expected to drop to around 35-36 mnt
  
  
• Production, offtake improve as market recovers post SC verdict, duty withdrawal
  
  
• Rising pellet capacity, domestic demand to boost output
  
  

Iron ore production in mineral-rich Karnataka is expected to fall by over 10% to around 35-36 million tonnes (mnt) in FY23, as per SteelMint estimates, from over 40 mnt in the previous fiscal. If April-November production numbers are any indication, iron ore production in Karnataka has fallen by around 20% to around 21 mnt during the period from over 26 mnt last year.

As per estimates, Karnataka's contribution to India's iron ore production in the ongoing fiscal is expected to shrink marginally by 1%. In FY22 Karnataka, with over 40 mnt of production, which was 16% of India's total production, had emerged as the second-largest iron ore producing state in the country.

It should be noted that iron ore production in Karnataka has been in excess of 31 mnt in the January-November period this year. SteelMint estimates India's iron ore production to fall to around 240 mnt in FY23 from over 250 mnt last fiscal due to marginal loss of volumes in Odisha and Karnataka. On the other hand, production in the other states has either been stable or showed a slight uptick.

Moreover, as per assessment, the share of PSU miners in the state's iron ore production is likely to rise to 39% from 35% in FY22. Merchant miners still dominate the market with over 34 mnt of production in the last fiscal, while the captive miners' output totalled just about 6 mnt. The respective shares of merchant and captive miners this fiscal are expected to be 84% and 16%.

NMDC is likely to emerge as the leading producer in FY23 with around 12 mnt of iron ore production followed by Vedanta and JSW Steel both at around 5 mnt. Notably, all the three are likely to witness marginal downturn in production volumes y-o-y.

Why output declined?

The contraction in iron ore production in Karnataka can largely be attributed to the standstill in the market post the Supreme Court verdict, which eased rules for sales of iron ore in the state and lifted export curbs on the mineral. Slow offtake of iron ore has been a major detriment to production.

Confusion still prevails relating to different aspects of sales and pricing, and iron ore e-auction sales dropped sharply due to uncertainty as regards sales and dispatches post SC verdict. Even today the majority of market players prefer the auction route, while direct sales have been reported in small parcels and reports of miners mulling long-term agreements (LTAs) have also trickled in.

There is lack of clarity on whether royalty and other statutory contributions should be made in one go. Some miners are quoting the base price inclusive of royalty, DMF and NMET, while others are excluding all three. IBM's average sales prices are issued after a delay of 2-3 months; so miners are uncertain about price discovery.

These factors apart, the government's imposition of export duties on steel, iron ore and pellets in May had a negative impact across domestic markets due to the possibility of supply glut and falling steel prices. An extended monsoon, too, took a toll on iron ore production in the state. However, with the withdrawal of export tariffs, the situation has changed for the better, with auction sales picking up.

Outlook

The apex court has raised the production ceiling in Bellary district to 35 mnt, while the cap has been raised to 15 mnt for Tumkur and Chitradurga districts. Enhancement of mineral production is expected from some of the mines in the near time. Also, after the withdrawal of tariffs on exports of low-grade ore, production may remain supported. Pellet production is set to edge higher in the state, thereby enhancing the prospect of exports, although domestic demand is expected to account for a predominant share of production. However, at least inventory of low-grade fines of around 6 mnt lying at mine pits may be readily available for exports.

Even as buoyant domestic demand is expected to boost iron ore output in the state, the relative underdevelopment of logistical networks may be a drag on production and dispatches.

Karnataka roadshow

How is Karnataka's iron ore and pellet industry shaping up post SC verdict? What is the potential in terms of production, demand, exports, and sales? Are you an industry stakeholder keen to find answers to these and several other queries? Book your seat at SteelMint's Road Show-cum-Conference on Karnataka's Mining Sector to be held from 19-21 January, 2023.