Iron ore prices are set to rise 30-40% after Odisha auctions: Crisil

Domestic iron ore prices are set to escalate between 30 and 40 per cent after mining commences again from the lapsing merchant blocks in Odisha following the successful conduct of online auctions.

A study by CRISIL Research illustrates that premium for most of the mines would exceed 40 per cent in a majority of the mines put up for auctions. The assumptions are based on the reserve price set by the Odisha government for auctions of iron ore blocks. The floor price for almost all blocks save Nuagaon ranges from 15-35 per cent of the sale value of the mineral as estimated by Indian Bureau of Mines (IBM). For Nuagaon block currently under the leasehold of KJS Ahluwalia, the reserve price is pegged at 50 per cent as it contains immense deposits of 790 million tonnes (mt).

The hike in iron ore prices in the aftermath of auctions will hinge on the auction premiums. Last year, domestic prices were half the landed prices, offering the merchant iron ore producers the latitude to raise prices.

CRISIL Research estimates that the landed price for a non-integrated steel maker on the eastern coast to be Rs 3700-3800 per tonne including royalty, freight and other charges. Non-integrated steel manufacturers contributed three-fourths to the nationwide steel output in FY19.

Though bidding for the 20 Odisha mines would be aggressive, the imminent supply disruption would be limited as existing miners have been ramping up production given the upcoming lease expiries, and the auction process that has begun is scheduled to be completed by end of February. However, the government’s decision on extension/non-extension of environmental clearances during the transition period will be a key monitorable for any supply disruption.

While 15 of the 20 mines to be auctioned predominantly have iron ore, three have both iron ore and manganese, while the remaining are primarily manganese reserves. The 18 mines containing iron ore reserves together hold 1600 mt of which 33 per cent (five mines) are reserved for specified end-use (captive usage). All are operative mines whose lease tenure ceases by March 31, 2020.

The report by CRISIL feels that high bidding in Karnataka has set the precedent for Odisha. Of the mines auctioned in Karnataka, JSW Steel won half. The weighted average bid premium for the 18 auctioned mines was 93 per cent with bids ranging from 37 per cent to as high as 130 per cent.