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Rio Tinto, the world's second-largest miner, is also the second-largest producer of iron ore, next only to Brazilian Vale. For this year, Rio has an iron ore production target of 295 million tonnes (mt). By contrast, India, with a resource base of 30 billion tonnes (bt), but severely constrained by court orders and a raft of controls, produced only 136 mt of ore in 2013-14.
For its apparent over-reliance on the steel-making raw material (iron ore accounted for about half the company's revenue in 2013), Rio will intermittently invite shareholder criticism. This is, however, sought to be deflected by the company's management maintaining China will remain a buyer of all the ore it can mine for years to come. Till recently, China had prospects of becoming a one-bt steel producer, supporting infrastructure building and manufacturing activities. This was the primary trigger for Rio, as it was for BHP Billiton, Vale and Fortescue, to expand operational mines and open new ones. Has extra supply of ore, resulting from capacity expansion, spooked ore prices, now at their lowest since September 2012? Isn't Rio chief executive Sam Walsh the right person to state the reasons for the price fall and where ore prices are headed in the second half of this year? Walsh says he is not bold enough to make a guess on whether ore prices will rise or fall. But to his credit, he anticipated prices would fall this year. Walsh says ore miners should start seeing themselves as "price takers", not "price setters".
| CHINESE MINERS IN A SPOT |
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Walsh's statement will be seen as turning the tables on ore producers, as annual contracts were replaced by quarterly ones. In another move to ensure lump ore prices closely reflect current market prices, steelmakers in China have started switching from a fixed lump premium negotiated every quarter to one providing room for change every month, based on spot lump premium. Last year, ore buyers, however, found it difficult to prevail upon miners to give up quarterly settlements of lump premium for bimonthly or monthly index-linked settlements. In March 2010, BHP and Vale were the first to do away with the 40-year-old system of annual contract pricing, opting for quarterly price-fixing, overcoming opposition from China. Under the annual price regime, Chinese steelmakers felt in price negotiations, leading miners didn't give them the importance commensurate with their large importer profiles.
But now, the dice is loaded against miners. They have lost on the pricing front on two counts. First, with China's principal steel consuming sectors-from infrastructure to house building and automobiles-seeing roadblocks, the country's steel production in the first quarter of this year grew a modest 2.4 per cent to 202.70 mt. Second, even while China's ore imports are forecast to climb to 850 mt this year from 820 mt last year, the market, as of now, is deluged by supplies from Australian miners who are trying to ship out as much mineral as possible in the financial year ending June. Though China is their target market, ore inventories at 44 major ports stand at about 110 mt. According to Dalian Commodity Exchange, the near two-year high port stocks are equivalent to 32.7 days of the country's steel production. Not under any pressure to buy ore in volumes, Chinese importers can afford to watch whether prices will breach $100 a tonne. Of the global seaborne iron ore trade of about 1.2 bt, the share of China stood at 68 per cent last year.
Steel Authority of India Ltd Chairman Chandra Shekhar Verma says three important factors in China will have a bearing on global iron ore trade. First, Chinese Prime Minister Li Keqiang is serious about reducing pollution caused by steel and other metal industries. Beijing has issued a fiat this year, 28.7 mt of polluting and inefficient capacity is to be phased out. Last year, China's largest steelmaking centre, Hebei province, announced 60 mt of outdated capacity would be done away with by 2017.
Verma says the push to use higher-quality ore, which will generate less slag in steelmaking, is part of China's campaign to control pollution. This is to translate into that country stepping down domestic ore production with iron content of only 22 per cent. Last year, China produced 1.45 bt of ore. But at current prices, China, an exceptionally high-cost ore producer, will be better off using less domestic ore and more imported mineral. To whatever extent the Chinese iron ore mining capacity falls due to environment and price considerations, by 2015, the world will still have to contend with an additional 240 mt iron ore production in other countries. Second, Chinese banks have become circumspect in issuing letters of credit for iron ore purchases, subjecting loan applications from steel groups to greater scrutiny. Third, says Verma, "You will see China, which has begun shutting blast furnaces (BF) of less than 100 cubic metres (cu m) steadily raising the BF dismantling cut-off to 1,000 cu m. Significantly, Chinese steel groups have finally applied the brakes on capacity expansion."
