Iron ore prices rally globally, but in India trade policies scuttle miners

That Indian iron ore exports would once again be dismally low in the financial year gone by leaving the miners fuming about their being left with mountains of pithead stocks was a foregone conclusion. As it would happen, Indian merchant exporters could not take advantage of the catastrophic rupture of Vale-owned tailings dam linked to a major iron ore mine in Brazil’s Minas Gerais in January. The death of at least 230 people because of the accident forced the world’s largest iron ore miner to pull 90 million tonnes (mt) of supplies. Irrespective of any commodity, such an occurrence would leave the market firmly in the grip of bulls.
 
Neither has there been a positive fallout on Indian exports from cyclone Veronica badly damaging several iron ore export hubs in Western Australia in March. Indian miners are ruing that because of New Delhi not agreeing to drop export duty on ore with iron (fe) content of up to 62 per cent, for which the local demand is always poor, the country failed to take advantage of surges in global prices of the steelmaking ingredient to near five-year highs on production setback in the world’s two largest production centres.
 
As dam rupture has curtailed Brazilian supply, cyclone affected BHP Billiton and Rio Tinto in turn have scaled down their production forecast for 2019. The certainty of shrinkages in the 1.5 billion tonne (bt) iron ore seaborne market has seen the price take a leap from $95 to over $100 a tonne, a development for the first time since 2011. But the material is still a long way off from the $187 a tonne seen in February 2011 when the price spike was triggered by supply disruptions in India. The previous peak of just above $208 a tonne happened in April 2008. But that price factored in a very high sea freight of $30 a tonne. The current Iron ore freight to Qingdao port in China from Australia is $6.43 a tonne and Brazil $16.3 a tonne.
 
Of greater relevance to India than where iron ore price will rule in the rest of the year is our virtual absence in the world market when bulls have everything going in their favour. It remains to be seen if the new government in Delhi will do away with the 30 per cent export duty on up to 62 per cent fe content ore to make the best of a global rally in the commodity and relieve merchant miners of accumulating pithead stocks. Analysts are in consensus that the seaborne market will tighten further through the rest of this year. London-based Liberum Capital says in a research report: “We have made significant upgrades to our iron ore price forecasts and now see risks prices could surge well through $110 a tonne in the second half of 2019."
 
An Odisha-based exporter says, Liberum changing its recommendation for BHP, Rio and Anglo American from “sell” to “buy” underpins the rally’s strength. Vale has now given warning that another of its mining waste dams is at the risk of bursting. Even while the dam holds waste from a Brazilian mine inactive since 2016, it collapsing will add further strength to price rally.
 

A local industry official says: “Besides the production setback factor, the 4.5 per cent growth in world steel production at 444 mt in the first quarter of 2019, driven principally by China making nearly 10 per cent more at 231 mt, is fuelling iron ore price rises. China’s GDP growth in 2019 may prove to be the slowest in 30 years. Surprisingly, however, iron ore on Dalian Commodities Exchange is drawing sustenance from some aggressive fall in Chinese port stocks.” The point also not to be missed is shrinking inventory of steel rebar and hot rolled coils with Chinese mills creating condition for high production.
 
Shackled by high export tax, India could export only 14.15 mt in the first eleven months of 2018-19. While precise figures for the year are awaited, there was no extraordinary rise in shipments in March. In 2017-18 too, exports suffered a steep decline to 20.99 mt from 30.48 mt in the previous year. Not very long ago, India was the world’s third largest exporter of the mineral. Exports peaked 117.37 mt in 2009-10 and then the combination of an adverse trade policy and court ordered restrictions on mining brought these down to 4.50 mt in 2015-16.
 
Take Karnataka where iron ore miners for the time being are reconciled to live with an annual production cap of 35 mt. But what they resent is that although they are not allowed to sell ore in other parts of the country, not to speak of shipments to foreign shores, steel mills close to coastal areas in the state are stepping up imports to keep local prices under pressure. Low import duty of 2.5 per cent is an incentive for Karnataka-based steel groups to use foreign origin ore in growing quantities. No wonder, then, India’s iron ore imports in the first eleven months of 2018-19 climbed to 12.64 mt from 8.70 mt in 2017-18 full year.
 
There is a constant tussle between steelmakers and miners for the government’s ear on export duty. Steelmakers want conservation of all iron ore, irrespective of quality for local value addition. Miners believe a country with a resource base of 33.276 bt, which is set to rise on intensive exploration, is well placed to meet growing requirements of local steelmakers and at the same time regain its status as a major exporter given the right trade policy. They say this is the only way to meet the steel industry’s 2030-31 iron ore requirements of 437 mt to support metal production of 255 mt.