Iron ore price to remain under pressure this year

Iron ore prices are unlikely to move up significantly this year on global surplus and falling demand from major countries, including China, Japan and the European Union. Indian iron ore miners, therefore, are seeing little improvement in realisation from exports.

“We are awaiting demand for steel to pick up, which will drive the demand for raw

materials, including iron ore. But, the sentiment may not improve for another one month,” said Rahul Baldota, executive director of the country’s leading private iron ore miner MSPL Ltd.

Prices of iron ore have fallen by 60 per cent in the last six months, from $80 a tonne to $50, as China, the major importer of Indian ore, cut steel production by 12 per cent in the fourth quarter of 2008. India exports 90 per cent of its iron ore to China, mainly of low ferrous content.

Other destinations, including Japan and the European Union, have also reduced steel production by 14 per cent and 25 per cent, respectively. The spot fines price in India has dipped about 80 per cent from its peak at $220 in February 2008. Its spot price now has started weakening again.

Meanwhile, Australian and Brazilian miners, including Cia. Vale do Rio Doce, BHP Billiton and Rio Tinto have started negotiating with Chinese miners at a discount. Analysts believe the world’s three largest iron ore producers may start discount competition tosell to their respective Chinese buyers.

The Citigroup report said the benchmark contract price for iron ore, hovering around $88 per tonne, may drop for the next two years. Iron ore miners and steel makers are in talks to set annual benchmark contract prices for 2009-10.

“Indian ores are sold mainly on spot basis and prices vary from consignment to consignment,” Baldota added.

Now, even in changed circumstances, Indian miners may not be willing to sign long-term contracts anticipating higher prices in near future. According to the recent Citigroup commodity report, Chinese ore imports have fallen less than the demand and inventory has accumulated. “A recent Chinese delegation quoted iron ore with 55 per cent iron content at $28 which was denied. We will hold our stocks until importers pay our price,” said Haresh Melwani, CEO of H L Nathurmal & Co, a Goa-based miner and exporter.

“Offtake from China is very low which is likely to continue for some more months. Therefore, ore shipment from Goa is expected to remain low in the months ahead. For the current financial year, however, total exports of Goan and non-Goan ore from the state is expected to remain closed to 39.5 million tonnes,” said Glenn Kalavampara, secretary, Goa Mineral Ore Exporters’ Association .

The global iron ore market is in protracted oversupply to the tune of about 70 million tonnes (a 50 million tonnes deficit in previous year) which is likely to rise about 50 per cent next year, the report said. However, corporate strategies will be critical in determining outcomes. The global iron ore exports are scheduled to increase 6.7 per cent in 2009 and 30 per cent by 2012. Further production cutbacks and cancellation of projects is required to keep the demand afloat, the Citigroup report said.