What factors are driving down Indian iron ore prices?

Average Indian iron ore prices have fallen by around 25% since the last week of Jun'21. Fines of Fe 62% have corrected downward from almost INR 9,600/t to INR 7,000/t levels in Odisha recently while lumps (5-18mm, Fe 63%) have dived down more sharply from above INR 14,000/t to around about INR 11,500-12,000/t ex-mines, incld Royalty, DMF and NMET.

These corrections have happened mainly in Odisha, which contributes the lion's share of India's iron ore production. A similar trend has not yet emerged in the Karnataka and Chhattisgarh sectors. However, Chhattisgarh's iron ore terrain is largely ruled by NMDC which releases monthly prices and SteelMint expects a similar price scenario to emerge here in the coming months down the line.

What are the factors driving this fall?

• Global iron ore prices drop: Prices across all major indices have nosedived because of a lack of appetite from China, although these did correct somewhat of late. DCE futures, after climbing to stratospheric over-RMB 1,200/t in May, are nestling a little above RMB 800/t ($124) currently. Australian Fe62% fines, after rising to above a dizzying $230/t, CFR China are scraping around at $148/t.
  
  

Although India is not a major iron ore exporter, global price movements impact Indian prices as export allocations drop.

• Export enquiries drop from China: With the price drop, export inquiries for iron ore and pellets have decreased from China on account of lower margin realisations. Export inquiries from Indian miners have dropped too. Lower export orders mean lesser allocations. India is one of the largest exporters of pellets globally, with around 13 mn t of exports per annum. If pellet exports drop, export realisations are impacted since no one wants to pay higher for the iron ore fines. At the same time, if pellets, a substitute for lumps, are available at a lower price, sales of the latter will improve.
  
  
  
• Indian iron ore production at an optimum level: Indian iron ore production has been cruising at a consistent, almost pre-Covid, level of around 20-21 mn t per month for some time and till August, there have been no supply hiccups to create room for a price increase.
  
  
• Indian steel production still below pre-Covid level: Although steel output has increased, it has still not climbed to pre-Covid levels. Over Jan-Jul'21, mills produced 29% higher at 68 mn t compared to 53 mn t in the year-ago period. On the other hand, iron ore production has increased, creating an imbalance between supply and demand.
  
  
• Inventories building up at mines: Miners are keen to generate inquiries and liquidate stocks and are thus cutting down prices. However, some buyers are also reluctant to book at current prices and are holding back their bookings on the expectations that OMC's previous auction did not get a good response which may allow the miner to reduce its base price, which is still higher than the market price at time global prices are falling. SteelMint heard that buyers are expecting a re-auction of the unsold lots where they expect the base price to drop. It may be recalled OMC's recent auction fetched bids for only 24,000 t of the 866,000 t put on offer.
  
  

Outlook

Iron ore prices will remain under pressure for some more time. Production may drop slightly from September because the leases of two miners, Sarda and Essel, expire in August. But this supply drop will not be enough to push up prices.

Buyers are hesitant to book over uncertainties in supplies. If the miners do not fulfil their MDPA production parameters they may have to surrender the mines. Sponge producers, for instance, are wary of booking directly with miners - in case their mine stops operating and supply gets impacted - and preferring to buy pellets. Fines are largely preferred by the primary mills which mostly have their captive mines.

However, SteelMint understands, prices will not crash or drop below a certain level because, first, production is slated to drop somewhat. Secondly, there is uncertainty as to how many mines may go out of the system. If more mines are surrendered then higher would be the production impact. But this aspect is still open-ended - as to whether the government would give the offending miners some leeway or not.

Prices as on 9:00 IST, 26 Aug. d-o-d changes indicated against closing price of 25 Aug.