Bidders Quote Twice The Base Price For Iron One Mines Amid Price Slump
Even as domestic iron ore prices fall, India’s steelmakers have quoted double the reserve price on an average to acquire mines in the ongoing auctions.
The second phase of auctions by the Odisha government for 10 mines has seen an average premium of 107%, according to data available on the state government’s website and SteelMint. While that’s lower than 133% in the first phase of the auctions in which 19 mines were available, it’s still high. The bid premium ranged from 81% for the Purheibahal iron ore block to 141% for Gandhalpada block.
The higher premium comes at a time when Indian iron ore prices have slipped as production remains consistent and there has been an inventory build-up. International prices, however, have started picking up pace in the last one month. Domestic steelmakers are not taking chances.
Preferred bidders or winners include established players in mining or steel industries against the last round where some of the companies had limited experience in the sector, said Jayanta Roy, senior vice-president at ICRA Ltd. The bidders include Tata Steel Ltd., Jindal Steel and Power Ltd. and Vedanta Group-owned Electrosteel Steels Ltd.
The big steelmakers are securing iron ore to insulate themselves from fluctuating prices in the future, according to Aruna Sharma, former steel secretary. Except for Rungta Mines—that quoted less than 100%—all others are end users or steel-producing firms, she said.
Jindal Steel plans to make Angul plant in Odisha the world's largest in one location and Kasia, in the same state, would be a good and strategic mine, the company said in an emailed response to BloombergQuint. The company is going to bring iron ore from Kasia to Angul through a slurry pipeline, which will reduce costs, it said.
The acquisition of Gandhalpada mine in Odisha is a strategic investment to ensure steady and assured supply of raw material, a Tata Steel spokesperson said in its emailed response.
The company’s steel capacity in India is targeted to increase from the current 20 million tonnes per annum to 40 MTPA in fiscal 2030. The corresponding iron ore requirement will reach about 60 MTPA, the company said. To achieve the ambitious target, Tata Steel will require a high quantity of iron ore in the future, it said.
Tata Steel, despite having captive mines available till 2030, has bid at an aggressive 140% premium, Rakesh Arora, commodity expert and managing partner at Go India Advisors, said. It seems to be fearing that India will turn a net importer of iron ore or is defending its relative advantage of being a captive steel producer, he said.
The bidding would address the foreseeable challenge of availability and sourcing of quality iron ore in the domestic market owing to increasingly lower share of merchant mining, the Tata Steel spokesperson said. It would also reduce import dependency, he said.
India was last a net importer of the steel raw material in 2015. Otherwise, the country has been exporting ore, ensuring there is enough supply in the markets.
As and when these mines will become operative, the open market demand will come down, according to Sharma. That will bring down the iron ore pricing power and the benchmarked rates of the Indian Bureau of Mines, leading to a lower realisation for the government, she said.
That's because the instalment of the premium will depend on the prevailing IBM prices, which are expected to fall due to a supply glut. The new regulations also allow sale of ore by captive miners in the open market.
According to the auction rules under the MMDRA Act, 2015, winning bidders need to make an upfront payment equal to 0.5% of the value of reserves. The rest is to be paid to the state in three instalments of 10%, 10% and 80%.