India's Iron Ore and Coal Prices Expected to Fall in Line With Global Prices

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Researched by Industrial Info Resources (Sugar Land, Texas)--As the consumption of iron ore declines rapidly in China and other prominent markets, the price of Indian iron ore is likely to fall to record lows during the next two to three months. Medium-grade iron ore with an iron content of about 62-63% is already being sold at a record low rate of $50 per ton. This downward trend is expected to affect both the spot markets and long-term contract prices.

India's iron ore exports amount to about 100 million tons per year, the majority of which is sold in China's spot market. However, with decreasing demand, the raw material is piling up at the ports. Information as of April 1, 2009, shows that of the 67 million tons of iron ore stocked in China's ports, 17 million tons is from India. Chinese mills have been negotiating with global miners about iron ore prices and are asking for a 50% reduction from last year's prices in view of the declining demand. The market fluidity promises to continue until the two parties arrive at an agreement. There has been a 13% drop in the prices of steel as well. Steel manufacturers are taking advantage of the lower iron ore costs and offering more competitive rates in the market.

According to Sidharth Rungta, Vice-President of the Federation of Indian Mineral Industries (FIMI) (New Delhi), the prices are expected to drop further. Mine owners have been facing huge losses and have been forced to scale down production by about 40-50%. Rahul Baldota, President of FIMI, said that no positive news is expected in the iron and steel sector for the next three months. The industry has had to face even higher operating costs because of the increased railway freight rates from January 2009.

From April 1, 2009, India's steel making majors have been demanding price cuts of 40-70% on key raw materials such as coking coal and iron ore. This situation is in complete contrast to the situation since 2003-04, when global steel makers had to accept price hikes of 70-90% in long-term contracts. The Indian steel sector has decided to take this measure after recent deals between Japanese and Chinese steel makers with global suppliers such as Rio Tinto plc (NYSE:RTP) (London, England), Companhia Vale do Rio Doce (NYSE:RIO) (Vale) (Rio de Janeiro, Brazil), and BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia) have resulted in price falls of close to 50-60%. New prices will be decided at the end of this month.

In 2008, Australia exported 261 million tons of coal, which is 4.1% higher than in 2007. Simultaneously, coal prices increased 109.2% to reach $144.99 per ton during the year. About 45% of the coal was exported to Japan. In 2009, the major coking coal companies of Australia fixed new prices with Japanese steel mills. These prices usually become benchmark prices and Indian steel-making companies intend to use those prices while negotiating for lower prices with suppliers.

India's state-run Steel Authority of India Limited (BSE:500113) (New Delhi) imports nearly 50% of India's total coking coal imports from Australia and the U.S. Coking coal prices jumped from an average of $96 per ton in 2007 to $300 per ton in 2008. However, the recent coking coal contracts between BHP Billiton and Nippon Steel Corporation (TYO:5401) (Tokyo, Japan) have set the price at about $128-$129 per ton, a drop of 57%. Indian companies that purchase iron ore from the market are of the opinion that iron ore prices should be brought down to about 40% of the current prices since global steel prices have dropped drastically in spite of a slow rise in demand.

India's state-owned iron ore producer and exporter NMDC Limited (BSE:526371) (Hyderabad, Andhra Pradesh) has been pricing high quality ore at $75 per ton, but global prices have declined from $200 per ton in March 2008 to $65-$70 per ton. NMDC is currently negotiating with Japanese steel mills to finalize long-term contract prices, which are set to become benchmark prices for the Indian domestic market as well.

The collapse of the global steel market has forced Australian coking coal producers to reduce prices by 60%. The landmark negotiations between the BHP Billiton Mitsubishi Alliance (Melbourne, Australia) and Mitsubishi Corporation (TYO:8058) (Tokyo) have brought down coking coal prices from $300 per ton to about $125 per ton. Thermal coal prices have been reduced from $125 per ton in 2008 to $70 per ton. The new prices came into effect on April 1, 2009. The 30% decline in the U.S. exchange rate has significantly offset the pain of the price cuts. Iron ore prices are expected to decline next.

Although the iron ore market picked up marginally between December 2008 and mid-February this year, the prices have not increased. The spot price of iron ore has reached $63.50 per ton, which is the price reached during the market collapse in October 2008. This suggests that this year's benchmark price is likely to fall by about 40%.

To add to the woes of Australia's coal market, China recently discovered domestic coal resources that are expected to adversely affect Australia's export figures. The 1,400-square-kilometer Sha'erhu coalfield is expected to have reserves of about 64 billion tons, 13 billion tons of which are proven reserves. Although the newly discovered reserves might stimulate the Chinese coal industry, several analysts are of the opinion that Australia's market will not be affected, as China does not have any single coal-producing company that could meet the country's constantly growing demand.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.