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Iron ore prices to rise 15-20% in FY21 after expiry of mining leases

By March 2020, more than 30 iron ore mining leases, all held by merchant or non-captive lessees, are scheduled to expire

Jayajit Dash  |  Bhubaneswar 

NMDC under pressure to cut iron ore prices for April

Iron ore prices in the country are projected to rise by 15-20 per cent after iron ore mining leases of merchant mines expire by March 31, 2020.

Since around 70 per cent of the steel makers - integrated or non-integrated - are operating without captive iron ore resources, they are wholly dependent on supplies from merchant miners.

In FY19, the country is estimated to have produced 207 million tonnes of iron ore, 65-70 per cent of which was supplied by the merchant miners, according to a report by Odisha alone produced 114 million tonnes of iron ore, accounting for over a half of the country’s output.

By March 2020, more than 30 iron ore mining leases, all held by merchant or non-captive lessees, are scheduled to expire. The leases headed for expiry account for 50-55 per cent share of Odisha’s iron ore production and 10 per cent of the output in other states. The lapsing of validity of such mines could shrink 30 per cent in overall production of the ore.

The merchant mines are nearing the date for cessation of validity. Yet, a sizeable number of blocks are not explored up to G2 level- a condition for their auctions.

The report by foresees three scenarios after the validity of merchant mines expires. The base case assumes that auctions would be organized in a phased manner from Q3 of next fiscal with leases largely being opened up for merchant miners. “This case stems from two facts. First, the vintage factor given that these mines have been previously owned by merchant miners since more than a decade and secondly that the entire ecosystem of secondary steel-making in the eastern region feeds from these mines. Around 40-45 per cent of Odisha’s merchant iron ore production is consumed within the state and the rest is outbound to other states”, the report noted.

In this scenario, the supply disruption will be limited as the auction process will be staggered. “While the rise in iron ore prices will depend largely on the auction premium, under the base case, we believe the premium will be more rational, keeping the long-term landed prices in mind. This shall translate into a price hike of 15-20 per cent in FY 2021 over the current fiscal”, the report added.

In the last fiscal, domestic iron ore prices were half of the landed prices. This offered comfort to merchant miners. Also, merchant miners making profits of 35-40 per cent leaves room for a 15-20 per cent hike.

The other possibility is extension of validity of merchant mining leases by three years, ruling out any supply disruption of iron ore. Moreover, prices of iron ore are likely to soften given the inventory build-up and the prospects of global prices mellowing after peaking at five-year highs.

Under a pessimistic scenario, the auction process may be delayed and the lapsing blocks will be offered for both merchant miners and end use plants. In this backdrop, the large steel players with better financial muscle will place higher bids to secure the mining resources. In this case, some 60 million tonnes in mining capacity will be blocked till statutory approvals are obtained.

In the event of iron ore crunch, the non-integrated steel players will suffer. In this fiscal, the landed price for a non-integrated steel company on the eastern coast is estimated at Rs 3600-3700 per tonne.

First Published: Thu, July 18 2019. 19:07 IST
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