Iron ore imports tumble 90% on inflated prices, slip to 7-year low

Iron ore imports tanked 90 per cent during April-October of this fiscal as steel makers opted for domestic sourcing amid rising international prices. This is the lowest level of imports recorded in the past 7 years, a study by CARE Ratings said.

In the corresponding period of last fiscal, iron ore imports swelled by 172 per cent. However, FY20 has seen a contrarian trend in imports with iron ore prices staying elevated. Steep prices prompted domestic steel makers to buy more domestically available ore and lessen dependence on imported supplies.

In the first 7 months of FY20, iron ore imports stood at 0.9 million tonnes (mt) in volume terms. At 37 per cent, South Africa had the highest share in India's imports, followed by Brazil (33 per cent), Australia (19 per cent) and Iran and Philippines with 6 per cent share apiece.

"In the remaining months of FY20, we expect imports to improve at a moderate pace, supported by softening of global iron ore prices and positive signs of improvement in demand from domestic steel players. Imports by the end of FY20 are expected at about 2 million tonnes – still a de-growth of 85 per cent y-o-y," said Vahishta M Unwalla, Research Analyst at CARE Ratings.

Iron ore exports from the country too, staged a rebound in the current fiscal. From April to November, exports soared 140 per cent. In the corresponding period of the last fiscal, exports declined by 35 per cent. Exports of iron ore are the highest in the past 8 years, according to the CARE Ratings report. China topped iron ore sourcing from India with a staggering 83 per cent share. The country's iron ore was also shipped to Japan, South Korea, Oman, Turkey and others.

Exports of iron ore pellets, an intermediate product in steel manufacturing, spiked by 58 per cent year-on-year (y-o-y) between April and October 2019. Three-fourths of the material was shipped to China. Steel mills in China have shown an enhanced appetite for Indian iron ore pellets with demand surging 72 per cent y-o-y to 5.7 mt in the period under review. Iron ore pellets were exported to Turkey, Korea, Malaysia, Oman and UK as well.

"Exports by the end of FY20 are expected at about 25-28 million tonnes, a growth of 160 per cent y-o-y. Rise in global prices led to the sharp increase in demand for domestically produced ore, along with increased demand from China for Indian pellets," Unwalla added.

International iron ore prices headed north from the beginning of calendar, zooming 58 per cent between January and July before softening from August onwards. Between August and November, prices fell by 30 per cent.

"The Vale dam collapse in Brazil led to the surge in global iron ore prices in the initial 7 months of the year. However, a slow steel demand globally did not help keep the prices upbeat and they gradually declined to reach $85 per tonne in November 2019," the CARE Ratings report noted.

With mining leases on verge of expiry, higher iron ore imports on cards

The drumbeat of voices forecasting India could rely more on global markets for iron ore next year is getting louder.

Delays in auctions of mining leases that are due to expire in March are threatening to disrupt the country’s production of the key steel-making raw material

and raising the prospect of higher imports, according to the Federation of Indian Mineral Industries.

“We see a bleak scenario as of now for the next year” for the mining industry and employment in the sector, R.K. Sharma, secretary general of the New Delhi-based industry group, said by phone Monday. “If we cannot produce, then we will import.”

The industry group isn’t alone in its prognosis. Citigroup Inc. last month forecast the country could become a net importer of 25 million to 30 million tons as the expiry of mining leases threatens to disrupt nearly a quarter of India’s output. That would be the most in records going back to 2009.

In 2015, India embraced competitive auctions as the best long-term approach to clamp down on corruption after scandals over allotments of mines. The slow pace of auctions could push the domestic iron ore market to a deficit from a surplus, and lead to a disruption of as much as 55 million tons of production capacity in the next fiscal year, ICRA Ltd., the local arm of Moody’s Investors Service, has said.

Under the new policy, India is set to auction 48 mining leases of independent miners before March 31, according to the mining federation. The new mining leases will be effective for 50 years.

Market Distortions

The auctions have been a total failure and even after three to four years, many projects are far from being operational, Sharma said, adding that about 260,000 people may lose their jobs if the mines up for auctions by next year stop production.

“With the kind of taxes we have on mining and the cost of auctions, it will distort the market,” Sharma said. That’s likely to push steel mills to evaluate whether importing the material would be a cheaper alternative to local purchases, he said.

India was last a net importer of the raw material in 2015 when the country shipped in 10.6 million tons of the mineral compared with 4.3 million tons of exports, according to trade ministry data. Last year, it exported 18.3 million tons and imported 15.89 million tons.

With mining lease on verge of expiration, higher iron ore imports on cards

The government is taking steps to avert supply disruptions. The mines department is in talks with the federal environment ministry to allow winning bidders of mines whose leases expire by March 2020 to start operations without delay if the mine has valid environmental and forest approvals, according to people familiar with the matter. Last month, it allowed state-run Steel Authority of India Ltd. to sell 25% of its annual production in the local markets to boost supplies.

“This year, everybody is trying to extract as much they can, because they don’t know what will happen after March 31,” Sharma said.

Iron ore imports shoot up 80%, exports plunge by almost half in last 3 yrs

The country's iron ore imports are steadily closing in on exports, trends in the past three years show.

From 7.09 million tonnes (mt) in 2015-16, imports have spiked to 12.8 mt at the end of FY19, data released by the Union commerce ministry reveals. In contrast, exports of key steel-making ingredients have subsided from 30.48 mt to 16.19 mt in the comparable period, plummeting by 46.88 per cent.

Imports of iron ore were driven by shore-based steel plants, which prefer to import more of higher grade ore. These plants imported larger quantities when the landed cost of the raw material was almost at par with domestic prices, which shot up to catch up with international prices. Iron ore prices at China's Dalian stock exchange surged to a record on Thursday, snapping a three-day slide. The most active iron ore contract on the exchange soared 5.4 per cent to $121.93 per tonne.

As opposed to imports, exports of iron ore have fallen due to a fragile demand for low grade fines in international seaborne trade.

China's steel mills pulled back imports of the baser grade ore as the government there tightened environmental regulations to meet emission norms. Indian producers also found it unviable to export richer grade ore as it attracted 30 per cent duty.

However, the export outlook has improved in the last few months after a blast at Vale's mines in Brazil shut off 70 million tonnes in annual supplies. The supply crisis has been magnified by a tropical cyclone striking Australia and impacting production at key mines. China is Vale's biggest buyer of iron ore and to recompense the loss, it has scaled up buying from other markets, including India.

“Global supply headwinds has meant that China is now buying more of lower grade fines from India. Inventory at China's ports has touched multi-year lows and the country's steel mills pursuing ramp-up plans are building up stocks. This has revived export demand for inferior grade ore. Indian exporters are also finding their shipments profitable with international iron ore prices rocketing to five-year highs”, said an iron ore miner.

He said, the outlook for exports have perked up as the international supply turmoil will not mellow anytime soon.

Imports are expected to be muted since the domestic market will be oversupplied. According to tentative figures, India produced 220 mt of iron ore in FY19. This fiscal, production is likely to rise by 8 per cent as merchant miners are scrambling to boost output from mines, the leases of which are due to lapse by March 31, 2020.

Iron ore and steel players urge govt to abolish import duty on coking coal

The iron ore and steel industry has urged the government to abolish import duty and GST compensation cess on coking coal, a key and expensive requirement in iron smelting.

India doesn't have good quality coking coal deposits, leading pig iron and steel manufacturers to lean heavily on imports. 

At the end of this financial year, the country's coking coal imports are pegged at 49.1 million tonnes--this corresponds to a share of 78 per cent of domestic consumption. India is projected to import 140.2 million tonnes (mt) by 2030- by then, the country's crude steel production is envisaged at 300 mt. The dependence on coking coal is set to fall to 65 per cent by 2030-31 as outlined in the National Steel Policy. 

Big steel makers have managed to manage coking coal price fluctuations, but the domestic merchant pig iron industry is reeling under losses. Sponge iron players, too, are dependent on imports.

“Since 2016, international coking coal prices have been highly volatile. Prices have zoomed 140 per cent since April 2016 whereas the corresponding rise in pig iron prices is only 46 per cent.

Coking coal has no substitute in steel making. Import duty of 2.5 per cent and GST compensation cess of Rs 400 per tonne is piling up burden for the producers”, an industry source said.

The other key demand of the besieged producers in iron and steel industry is rationalizing royalty rates on iron ore, also a critical input alongside coking coal.

At 15 per cent, India's iron ore royalty is the steepest in the world. Brazil, the top producer, levies only two per cent. Australia, another large ore producer, has royalty on iron ore in the range of 5.35-7.5 per cent.

The domestic producers feel iron ore royalty in India needs to be lowered to 5-8 per cent to align with the competitive tax practices in other resource rich nations.

Besides coking coal price pressures, the pig iron ore makers have also been roiled by rising stream of scrap imports. Between FY17 and FY19, scrap imports have grown by nine per cent, leading to forex outgo of $1.77 billion (till February 2019).

Imported scrap feeds 15 per cent of the domestic pig iron demand of 35 mt per annum. And, with scrap competing with pig iron, lower price scrap imports have unduly pressured the domestic players, resulting in shutdown of many units.

To tame the swelling scrap imports, the pig iron players have urged the Government to hike duty from 2.5 per cent to 10 per cent in 2019-20 Budget.

A review of Minimum Import Price (MIP) of scrap to align it with current domestic level and implementing BIS standards will also spell relief for the domestic makers, they suggested.