Domestic iron ore prices might drop 30%

Global oversupply and decline in demand from Chinese steel mills is likely to pull down spot prices to around $65 a tonne in next two years

Iron ore prices are likely to fall further and stay in the range of $60-65 a tonne globally, following  huge oversupply and decline in demand from China. As a result, domestic iron ore prices might decline 30 per cent in coming year as imports will put pressure on domestic mines to keep prices in check.

Currently, prices are $75-80 a tonne in the international market depending on the grade. According to Citi Group,  prices are set to drop to $50 a tonne in the next two years and average $74 in the first quarter next year, moving down to an average of $60 in the third quarter of 2015.

“The recent sell-off has been driven by weak demand and deleveraging. While the first half of the year saw prices driven lower as supply increased, Q3’s sell-off was driven by deteriorating demand and deleveraging of traders and Chinese mills, with prices now selling off on APEC (Asia-Pacific Economic Cooperation) and pollution-driven steel production curtailments. We expect renewed supply growth to again drive the market lower, combined with further demand weakness,” Citi Group said in a report.

The reason behind the projected fall is the surplus in iron ore production globally, currently at 250 million tonnes and estimated to touch 370-400 million tonnes (mt) by 2017. If the global surplus exceeds 400 million tonnes, the price will fall to $50-60 a tonne. Also, the demand from China has come down in recent months. China’s steel consumption growth turned negative this year, the weakest since 1989, according to a Goldman Sachs report. “We believe such weak demand is mainly due to the sharp slowdown in China’s property industry. China’s steel production growth rate has also slowed significantly as a result and despite a sharp rise in exports. We estimate Chinese steel production growth of 13 per cent per annum is needed in 2016 to absorb new iron ore supply, which is highly unlikely,” the Goldman Sachs report noted.

“If the prices go down in the spot market to $60 a tonne, we can expect iron ore prices to decline by 30-35 per cent in India. The base price is currently ranging at Rs 2,500 a tonne for 60 per cent Fe grade. This will be good news for steel mills as they can increase their ore import,” said Basant Poddar, senior vice-president, Federation of Indian Mineral Industries.

Cheaper import will result in increase in imports of Iron ore, which is pegged at 20 million tonnes for 2014-15, an all-time high compared to 3.05 million tonnes imported in 2012-13.

“If the prices keep falling globally due to oversupply of 250 million tonnes, we can expect further rise in imports. At this rate, we might see doubling of our imports in the next financial year,” said H Noor Ahmed, president, FIMI.

According to him, even smaller steel mills might opt for import of the commodity in the coming days.

Already, big players such as JSW Steel and Tata Steel are importing. JSW Steel has announced import of around 10 million tonnes for the current financial year.