Firm Chinese demand, weak rupee, domestic offtake bolster pellet makers

A favourable spread between prices of pellets and iron ore fines has also buoyed iron ore pellet makers

Domestic pellet manufacturers, both captive and merchant players, are looking at higher capacity utilisation and better margins on firm Chinese demand. Pellet makers are also gaining in realisations due to a depreciating Indian currency.

Apart from strong export market demand, healthy offtake from steel industries and a favourable spread between prices of pellets and iron ore fines has buoyed iron ore pellet makers. According to a note by ratings agency Icra, capacity utilisation of pellet units was lacklustre till the end of FY17, as a depressed domestic demand failed to keep pace with large capacity additions. The trend, however, is poised to reverse, as pellet makers are expected to operate at higher capacities, spurred by demand uptick.

Jayanta Roy, senior vice-president and group head, Corporate Sector Ratings, Icra, says, “Given the significant share of low-grade iron ore fines in India’s total iron ore production, there is a growing need to beneficiate inferior grade ore and feed its output to pelletisation plants, to make the ore usable in steel making. Domestic pellet makers are also expected to benefit from a robust domestic and Chinese demand environment.”

The Indian pelletisation ecosystem is made up by two categories- integrated steel plants like JSW Steel, Essar Steel and Jindal Steel & Power Ltd (JSPL) operating their captive facilities and merchant operators such as KIOCL Ltd and Brahmani River Pellets Ltd (BRPL).

Till the end of 2009-10, the installed capacity in pellet making stayed muted with only 21 million tonnes per annum (mtpa). The nameplate capacity rose sharply to 87 mtpa in FY17, logging a CAGR (compounded annual growth rate) of 22.8 per cent though capacity utilization was underwhelming at 55 per cent against a global average of 80 per cent. But Icra believes, the total design capacity of pellet making is set to escalate to 100 mtpa by 2020 on the back of planned additions by large steel makers. Three-fourths of the pellet plants are concentrated in Odisha, Karnataka, Chhattisgarh and Jharkhand.

Due to a conducive export market situation, pellet makers are raking in higher gross contributions (difference between sales price and cost of raw materials & consumables) on exports compared to domestic sales. In addition, a weaker rupee has sustained higher realizations for pellet makers, fuelling a sharp growth in exports. Gross contributions from domestic sales have touched Rs 2450 per tonne, nearing the highs achieved in 2012-13. By contrast, contributions from exports have bettered domestic realizations at Rs 3000 a tonne though lower than the export highs of Rs 3900 recorded during FY13.

Pellets are outpacing trade of iron ore fines in export markets. China's steel mills have shown propensity to buy pellets, cutting down on volumes for higher grade fines as pressure mounts on them to cut polluting emissions. Pellets score in exports as they attract minimal or zero tax. This is opposed to 30 per cent export duty levied on iron ore fines above 58 Fe grade.

China is the principal buyer of Indian iron ore pellets. In FY18, China's uptake was 81 per cent of the total pellet volumes of 9.31 million tonnes.

“Given the Chinese government’s intent to curtail production of polluting industries, including sinter plants in steel mills, its procurement of higher grade iron ore (including pellets) has been on the rise. This in addition to its increasing steel production levels is likely to support international pellet prices in the near-to-medium term. There could be a temporary moderation in pellet prices during the winter months in China (November to March) when the steel production is likely to be curtailed to contain pollution. However, China’s recently announced stimulus to prop up infrastructure demand is likely to aid steel production growth, which in turn is likely to keep pellet prices buoyant”, Roy added.