Why Local Iron Ore Prices May Have Found A Support

The price of domestic iron ore has fallen since July as supply improved even as international prices rebounded. Analysts now expect local prices to find support as well.

NMDC Ltd., India’s largest iron ore producer, has been cutting rates since July, according to company filings. The raw material sank 32% over the past six months, with sharp decline in September and November. In comparison, the price is up 10% in the international market over the past month, according to Bloomberg.

Prices in India fell as Odisha, India’s largest producer of the raw input for steelmaking, has ramped up supply in the last two months.

Higher Production

The country’s iron ore production rose nearly 45% year-on-year to over 140 million tonnes in April-October 2021, according to industry journal SteelMint. The Covid-19 pandemic stalled mining and logistical operations, and cast a shadow on manpower availability last year.

As a result, India’s iron ore output rose 50% over the preceding year in the first six months of the ongoing fiscal.

SteelMint pegs Odisha’s iron ore production for FY22 at 145 million tonnes—from 107 million tonnes a year ago.

Analysts, however, expect the decline to halt.

“Although floor prices of domestic iron ore have been higher than international prices, but they eventually reflect the same sense of direction,” said Rakesh Arora, managing partner of Go India Advisors.

He said higher international prices would force west coast players like JSW Steel Ltd. and ArcelorMittal Ltd. to source ore domestically, giving an edge to such players.

Arora also expects the cut in China’s cash reserve ratio, which would boost liquidity in the system, and restocking ahead of the Chinese New Year to further bump up international prices.

On a one-month and five-day basis, the benchmark SGX iron ore has advanced by more than 9%, according to Bloomberg data. That’s more than any other commodity.

That recovery follows a sharp decline. Iron ore prices have slumped more than 50% from their peak in May on China’s pledge to cap annual steel volumes, Bloomberg reported earlier this month.

International and domestic prices are linked to one another.

“Domestic iron ore prices directionally follow international trends eventually, although they rule at a discount compared to international levels, as has been witnessed in the past,” said Jayanta Roy, senior vice president and sector head of corporate sector ratings at ICRA Ltd.

“When international prices move up, domestic prices find support from higher export demand, notwithstanding the export duty that good quality ore attracts,” he said. The rating agency said changes to steel production in China, owing to the issues in its property market, could affect global iron ore demand and prices.

Implications For Domestic Firms

Steelmakers don’t expect the ongoing situation to help their spreads as any more cuts by local iron ore miners may make business unviable.

According to VR Sharma, managing director of Jindal Steel and Power Ltd., iron ore firms are in a Catch-22 situation.

“On one hand, these players can’t increase their prices because globally prices have remained low thus far and local integrated players in the likes of JSW Steel are supplying iron ore for a price lesser than Rs 1,000 per tonne,” he said. “But on the other hand, even if these players want to reduce the prices to stay in the business that will only be until their trade is viable.”