India's Iron Ore Prices Drop Nearly 50% Since June

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Researched by Industrial Info Resources (Sugar Land, Texas)--Prices of medium-grade iron ore in India have registered a near 50% downward spiral in the last four months to about $75 to $85 per ton free on board from the peak levels of $130 to $140 per ton recorded in June. Ocean freight rates have dipped to $30 per ton from $50 per ton over the last couple of months. Spot prices for iron ore in the global market have also declined from $190 per ton in August to about $120 per ton currently. India registered a 26% slump in iron ore exports in September at 3.08 million tons over the previous month as a result of a dip in steel consumption worldwide. The country exported about 8.5 million tons of iron ore in May.

The iron ore industry is asking the Indian government to lift the 15% export duty that was imposed on iron ore in June, following demands from the steel industry to discourage iron ore exports and make more metal available for domestic consumption. However, the Ministry of Steel maintains that exports fell primarily because of declining global demand and not the export duty and is using this contention to leverage an additional increase of 20% on export duty of iron ore.

However, analysts believe that the global recession and lack of credit availability are the main culprits especially with the post-Olympics slide in demand for steel from China, which accounts for nearly 75% of India's iron ore exports of 100 million tons per year. India's iron ore industry has indicated that mines may have to curtail ore production unless demand from China surges and further added that if iron ore prices fell below $100 per ton, it may become unviable for the industry to sustain production because of high transportation costs. China's iron ore imports are likely to hover around 400 million tons in 2009 but there is likely to be a surplus of 100 million tons in iron ore supply worldwide, which will push prices further down. While shipments to China usually increase after September when monsoon season ends, Chinese firms are now backing off old contracts, demanding a reduction in the price of iron ore exports. Estimates reveal that the fall in iron ore exports could be around 40 million tons in the current fiscal year with the average export price at around $80 per ton.

India's government has decided to undertake a reassessment of iron ore reserves in the country, including those owned by steel majors such as Tata Steel (BSE:500470) (Mumbai) and the Steel Authority of India Limited (BSE:500113) (New Delhi) to evaluate whether their demand for capacity expansions of captive ore mines to ensure raw material security is justified. Tata Steel is on the verge of investing $20 billion over the next 10 years to increase its steel manufacturing capacity five fold to 25 million tons per year. The firm will require 1.8 billion tons of additional iron ore for proposed projects, including a 12 million-ton-per-year greenfield steel plant in Jharkhand, a 6 million-ton-per-year unit in Orissa, a 5 million-ton-per-year plant in Chhattisgarh, and an expansion project at the Jamshedpur facility that will double the plant's production capacity to 10 million tons per year. The Steel Authority also plans to invest $11 billion to raise its steel output to 26 million tons per year and is looking to secure an iron ore supply of 5.74 billion tons over the next 50 years. Of this, 2.71 billion tons of raw material would be consumed by existing and upcoming steel plants in Jharkhand.

India currently has iron ore reserves of about 25.25 billion tons, of which 14 billion tons can be mined feasibly. It is estimated that the present levels of iron ore reserves in the country would suffice to sustain production of 180 million tons per year of steel until 2020. However, 60% of India's iron ore products is currently being exported. The steel industry contends that iron ore exports enable importing countries like China to manufacture steel and finished steel goods that are then imported back into India, flooding the domestic market. Further, the gap between the cost of domestic steel and the landed cost of imported steel has narrowed down to 2% to 3% as opposed to the earlier difference of 17% to 20%. This would have an adverse impact on the domestic steel industry, which is looking to capitalize on the increased demand for steel from the burgeoning power, infrastructure and retail industries in India. India's domestic consumption of steel is expected to reach 200 million tons per year by 2020. Steel makers are relying on growth in steel consumption, estimated at 25% over the next two years, to offset the pressure on revenues brought about by declining steel prices. The Ministry of Mines is also exploring potential areas of synergy between merchant miners and domestic steel producers in an attempt to resolve conflicts in interests of the two industries.

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