SteelMint: Odisha iron ore index sinks to nearly 2-year low on gloomy steel outlook

• Steel prices in freefall
  
  
• Pellet producers go on maintenance, cut production
  
  
• Surprisingly, OMC hikes prices for upcoming auction
  
  

Morning Brief: Iron ore prices in India have dropped rapidly over the last one month or so. The rapid decline is nowhere more evident than in Odisha, a state that accounts for over half the country's annual iron ore production.

SteelMint's benchmark Odisha iron ore fines (Fe62%) index has slipped to nearly the lowest level in two years. The index was assessed at INR 3,150/tonne (t) ex-mines (including royalty and other statutory cesses) on 18 June 2022. It deserves mention that the index has fallen from over INR 6,000/t in February-March. In fact, iron ore fines prices in Odisha have touched the nadir since SteelMint started the index in November 2020.

Duty blow

The market has been in freefall since the government slapped an export duty of 50% on iron ore irrespective of grades on 22 May last as well as a prohibitive 45% duty on pellets exports. The announcement of steep export duties on steelmaking raw materials signalled the government's intent to curb exports, facilitate higher domestic supplies and control prices.

As a consequence, iron ore and pellet prices crashed in the domestic market on apprehension of surplus availability and a sharp decline in prices in the absence of exports, with buyers deferring iron ore lifting as steel prices slipped at a fast pace.

Pellet prices down

India's pellet production capacity currently stands at around 110 million tonnes (mnt). In FY'22, the country's pellet exports fell to 11 mnt from over 13 mnt in the previous fiscal.

SteelMint's bi-weekly domestic pellet (Fe 63%) index, PELLEX, fell to INR 7,450/t DAP Raipur on 21 June from over INR 13,000/t in March this year and from highs of nearly INR 17,000/t in the year-ago month, as buyers stayed on the sidelines due to sluggish demand and market uncertainty.

SteelMint heard from sources that major Indian pellet producers, especially export-oriented units based in the eastern belt, have taken maintenance breaks in a falling market. Some of the major players are operating at around to 50-60% capacity, it is being heard.

Steel prices fall

Subdued steel raw material prices, however, are direct fallout of softening steel prices in the domestic market triggered by the imposition of 15% export duty on steel products that comprised around 93-94% of the country's finished steel exports of over 13 mnt in FY'22.

Not to forget, high inflation is impacting demand at a time when the market is enveloped in a bearish outlook.

SteelMint assessed benchmark hot-rolled coil (HRC) prices at INR 61,400/t exy Mumbai on 15 June - down over 11% month-over-month. For perspective, prices have crashed nearly 17% from levels prevailing three months back.

Similarly, prices of reinforcement steel bar (produced through the BF-BOF route) used widely in construction projects dipped to INR 59,600/t exy Mumbai on 17 June, as per SteelMint assessment, down over 10% m-o-m.

Global impact

Moreover, domestic iron ore prices are edging down as global prices are on a downward spiral. Benchmark Fe62% Australian iron ore fines prices fell to nearly $110/t CNF China on 21 June, thereby surrendering all the gains made this year after prices had sunk below $90/t levels in November 2021.

Weak demand in China is the foremost reason for the gloom surrounding iron ore as the Middle Kingdom accounts for over 70% of global seaborne trade in steelmaking ingredient. China's zero-COVID policy and extended lockdowns have sapped downstream demand, while inclement weather in South and North China is impeding construction activity.

Besides, recovery in supplies after pandemic and weather-related disruptions in Australia and China's steel production rising nearly 1.5%, m-o-m, in May to over 96 mnt - have intensified pressure on prices.

In addition, billet and rebar price sentiments in China are gloomy. Weak margins and low demand have affected the BF utilisation rate - just over 80% at present - and mills are taking maintenance shutdowns due to high inventory levels.

Outlook

On the domestic front, Odisha Mining Corporation (OMC) has rescheduled an auction for iron ore fines and lumps for 23 Jun'22 which, originally slated to be held on 17 June, was postponed. Interestingly, the State-run miner has raised the base price for lumps by up to INR 1,150/t and that for fines by up to INR 800/t as against the base prices of the last auction.

The sudden hike in base prices has expectedly left the market confused and somewhat panic-stricken against the backdrop of weak steel prices, low realisations and near-zero interest of buyers in booking material at iron ore auctions throughout June.

Despite some short-lived pre-monsoon restocking, steel demand remains low. Undoubtedly, a pall of gloom surrounds the iron ore market.