Miners mulling cut in iron ore output

Shaken by a sudden halt in demand from China, Indian iron ore miners are planning production cuts.

According to the Federation of Indian Mineral Industries (FIMI), the high prevailing prices due to price-based royalty and skyrocketing railway freight rates are making export of iron ore to China uncompetitive.

“There has been no enquiry from China for the last 15 days and most importantly, nobody can predict how long this will continue,” said RK Sharma, secretary general, FIMI.

Indian iron ore miners are watching the situation closely as both China, the world’s largest consumer of the ore, and Australia, the largest miner, are under tremendous pressure to end their deadlock over cut in prices of long-term contracts. Since iron ore exports contribute significantly to the Australian economy, Australian miners are keen to resume supply to China. The country’s overall exports fell 19 per cent to A$47.6 billion in the second quarter as shipments of coal slumped 26 per cent and iron ore 21 per cent.

On the other hand, China has its own ambitious plans for steel production in 2009. According to data compiled by the China Iron and Steel Association, the country’s crude steel production was at an all-time high of 1.67 million tonnes in the first fortnight of August, which would take the annual production to 610 million tonnes, a rise of 20 per cent from the 500 million tonnes in 2008.

Chinese steel mills, which consume more than half the globally-traded iron ore, have stopped procuring ore from the spot market, including India, resulting in about 25 per cent decline in global prices in the last fortnight. The spot price of 63.5 grade iron ore has fallen from $115 to $85 a tonne.

Iron ore stockpiles at major Chinese ports were at 72.15 million tonnes towards the end of August, a rise of 430,000 tonnes from the same period last year. Imports in July had jumped 32 per cent to a record 58 million tonnes.

“A short period of 15 days is not a trend-setting period to justify a production cut. However, if the trend continues longer, the industry will have to slow down,” said Rahul N Baldota, executive director, MSPL.

Meanwhile, mining in Goa, which exports over 40 per cent of its low-grade iron ore to China, has come to a standstill because of notices from the Ministry of Environment and Forests. Fourteen mines out of 100 have been closed in the last one month, while another 74 are on the verge of closure. Miners were not keen on getting environment clearances because of the slump in demand from China, said Glenn Kalavampara, secretary, Goa Mineral Ore Exporters’ Association.

At the current price of $85 a tonne, shipments to China were not competitive due to 10 per cent ad valorem royalty and Rs 200 a tonne increase in railway freight charges, said Sharma.