There May Be No Respite From Higher Iron Ore Prices, For Now
A truck with raw ore at open-pit mine. Photographer: Joe Buglewicz/BloombergA truck

There May Be No Respite From Higher Iron Ore Prices, For Now

Iron ore prices have risen the most among ferrous commodities so far this year globally as demand for the key raw material used in steelmaking rose once economies around the world restarted following the Covid-19 pandemic.

Prices of Dalian Commodity Exchange iron ore have risen more than 50% so far this year compared with hot-rolled coil steel’s 20% gain and steel rebar’s 12% increase, according to Bloomberg data. Prices have also increased in December.

Yet, a disparity exists between international and domestic prices of iron ore. That comes even as domestic prices surged to a record in December, according to Bloomberg data and exchange filings by state-run miner NMDC Ltd.

The surge in domestic iron ore prices is due to:

  1. Similar trend in international prices.
  2. Mining activities being disrupted in Odisha—a key ore producing state.
  3. Strong demand from the steel sector.

While high international prices provide room for domestic iron ore exporters to expand, disruption in Odisha has provided a leg up to Indian iron ore industry—at least for the near term.

Companies like NMDC and steel and pellet makers with integrated iron ore capacities are expected to benefit.

International Price Rally To Sustain

International iron ore prices have rallied to a seven-year high, largely on account of a mine disaster in Brazil, which shuttered a significant chunk of output in Vale SA, the world’s second-largest ore producer.

Demand picked up in the second half of this year, according to Bloomberg data, with China, the largest consumer, spending heavily on construction to rescue an economy that cratered in the wake of the pandemic.

Analysts expect international prices to remain high, given the supply side issues and growing demand. Amit Dixit, assistant vice president–research at Edelweiss Securities, told BloombergQuint he expects the trend to sustain in FY21 amid maintenance issues at BHP and Rio Tinto keeping production subdued in Australia, and a slower-than-expected ramp up by Vale apart from possible seasonal weather-related disruptions in the fourth quarter of the ongoing fiscal in Australia and Brazil.

Odisha Disruptions

Production disruption in Odisha has resulted in domestic iron ore prices scaling record highs as mines with aggregate capacity of 85 million tonnes per annum that underwent bidding haven’t resumed production at rated capacity. That’s in contrast to the situation during December-March when production rose after merchants ramped up capacities ahead of mining leases’ expiry in March 2020.

With international prices surging, NMDC has raised its notified price for the second time in December. The company has raised its notified price again in December by 12% for fines and 15% for lumps.

Yet, NMDC’s fine prices at discount to international and Odisha iron ore prices.

Sustained Steel Demand

Sustained steel demand, globally as well as in India, has been among the factors contributing to rise in iron ore prices.

While in India, demand was led by automakers—which companies like JSW Steel Ltd. and Tata Steel Ltd. mentioned in their commentaries for the quarter ended September—accelerated infrastructure activity on the global front, in countries like China, has bolstered demand of the alloy amid declining inventories.

Who Stands To Gain?

Higher demand for finished products like steel and the disruption in Odisha has worked well for NMDC till now, which has hike fine prices 2.5 times since June. Analysts expect NMDC to be in a strong position to implement further hikes given the difference between Odisha prices.

Rakesh Arora, market expert, said it’s the sellers’ market with supply normalcy some time away and the sharp shortages in India and abroad aiding the iron ore rally. This should benefit producers like NMDC, he said.

Apart from steel, integrated pellet makers like Godawari Power & Ispat Ltd. are expected to witness gains as their prices are also set to inch northwards. According to steel mint data, Indian pellet export prices have risen to a seven-year high of $170 per tonne FOB India.

What To Look Out For

A sudden decline in international prices could be a game changer since the Chinese steel industry has sought government intervention after it complained that speculation, and not fundamentals, have driven up ore prices.

That apart, Union Minister for Road Transport and Highways Nitin Gadkari recently sought the Prime Minister Narendra Modi’s intervention in the near-55% hike in steel prices by companies over the last six months, making projects unviable.

This may limit the rally for iron ore industry which was able to pass on price hikes to steel makers till now, resulting in higher costs to buyers.

But Ritesh Shah, analyst at Investec, expects iron ore prices to remain firm for the next 2-3 months as Odisha production issues are unlikely to get resolved anytime soon and domestic iron ore prices will remain at a discount to global prices.

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