Kunal Bose / Sep 18, 2012
Business Standard
The Director General of the Federation of Indian Mineral Industries (Fimi), R K Sharma, has reasons to be distraught about the ascending stocks of iron ore at pitheads and unrelenting steep fall in export of fines. Sharma’s contention is the 30 per cent ad valorem export duty on fines as it has brought down ore exports to 57 million tonnes (mt) in 2011-12 from 97.66 mt in the earlier year. The resulting surge in pithead stocks is forcing miners to work at much reduced capacity. Consequentially, Indian iron ore production was down to 169.7 mt last year from 208 mt in 2010-11. Railway freight on ore meant for export being 3.6 times more than when the mineral is sent to local destinations, sales abroad are becoming an increasingly difficult proposition.
Sharma says for the local mining sector, the export duty and railway freight have become oppressively burdensome as the “sputtering demand for iron ore in the world market sent prices of the benchmark ore with 62 per cent iron content to $82 a tonne in August-end, a fall of more than 50 per cent on a year-on-year basis.” In the process, the mineral fared worst since October 2011. Some relief, however, came miners’ way with smart rallies in the last few sessions lifting ore prices to the $100-a-tonne level. Market sentiment is so down that traders will tend to extend their positions on any good news break. In the present case, they are making a virtue of Beijing approving some major infrastructure projects worth $158 billion. So, we have seen ore prices rebounding 15 per cent in three sessions, reclaiming more than half of what was lost in August. Sharma says China by virtue of its 60 per cent share of global seaborne trade in ore and 46 per cent share of world steel production will necessarily have a profound influence in the way the market for these two commodities behaves.
The excitement over Chinese infrastructure news will be quickly over, with brokers mulling over the sustainability of ore prices in the context of weak fundamentals of the world steel industry. According to World Steel Association, Chinese steel production at 419.46 mt till July 2012 was up 2.1 per cent y-o-y. What, however, remains in the back of every broker’s mind is a statement issued earlier by China Iron and Steel Association that it is “highly probable” that this year, for the first time in 31 years, the country might have nil or negative growth in steel production. Announcement of some major infrastructure projects by China is fine, but as Financial Times quotes a broker as saying: “We don’t know in what way these will become real demand in steel markets. It is a question mark.” For the last many years, China virtually bought all the ore that India had on offer. This explains why any Chinese move is so closely watched by our ore exporters.
Price improvements in the last few days have come as a pleasant surprise for them. They, however, find the development somewhat intriguing, for when earlier this year the Chinese central bank cut benchmark interest rates on two occasions and Beijing flagged off some major projects involving potentially large use of steel, these did not lead to demand improvement for ore. A fall in Chinese steel prices by a quarter so far this year and profits of steel mills plunging nearly 50 per cent in the first half show dimness of steel in the mainland. But what then could be the consideration for Chinese mills to step up steel production on a base already hugely large? FT thinks it is “because many state-owned mills are incentivised to maximise revenues instead of profits. Revenues from steel mills mean more tax revenues for the local government, their ultimate owners.” In fact, it is because of some local governments looking the other way that China’s progress in weeding out technologically obsolete and polluting steel capacity is less than satisfactory.
No doubt, brokers have drawn some inspiration from China’s imports of the mineral rising 5.7 per cent in August to 62.5 mt making a total of 486.68 mt for the first eight months. At the same time they think ore shipments to China will fall this month from the August level in the face of steel mills contending weak demand and low prices of the metal. What will also not allow ore prices to climb easily from here is the accumulated mineral inventory of over 100 mt at 25 major ports in China. Instances of Chinese mills walking away from supply contracts with miners, including a few from India show the underlying market weakness. Ore market may, however, start behaving better in the fourth quarter when traditionally Chinese mills build up stocks ahead of freezing winter weather causes major dislocations in port operations. Could there be any upside for ore when the global demand for steel remains lukewarm? The median of estimates by seven analysts that Bloomberg spoke to is that ore may trade at $148 a tonne in the next quarter. Not many brokers will stick their neck out on this. What needs to be factored in is that the ore market will remain oversupplied in the near term.
Business Standard
The Director General of the Federation of Indian Mineral Industries (Fimi), R K Sharma, has reasons to be distraught about the ascending stocks of iron ore at pitheads and unrelenting steep fall in export of fines. Sharma’s contention is the 30 per cent ad valorem export duty on fines as it has brought down ore exports to 57 million tonnes (mt) in 2011-12 from 97.66 mt in the earlier year. The resulting surge in pithead stocks is forcing miners to work at much reduced capacity. Consequentially, Indian iron ore production was down to 169.7 mt last year from 208 mt in 2010-11. Railway freight on ore meant for export being 3.6 times more than when the mineral is sent to local destinations, sales abroad are becoming an increasingly difficult proposition.
Sharma says for the local mining sector, the export duty and railway freight have become oppressively burdensome as the “sputtering demand for iron ore in the world market sent prices of the benchmark ore with 62 per cent iron content to $82 a tonne in August-end, a fall of more than 50 per cent on a year-on-year basis.” In the process, the mineral fared worst since October 2011. Some relief, however, came miners’ way with smart rallies in the last few sessions lifting ore prices to the $100-a-tonne level. Market sentiment is so down that traders will tend to extend their positions on any good news break. In the present case, they are making a virtue of Beijing approving some major infrastructure projects worth $158 billion. So, we have seen ore prices rebounding 15 per cent in three sessions, reclaiming more than half of what was lost in August. Sharma says China by virtue of its 60 per cent share of global seaborne trade in ore and 46 per cent share of world steel production will necessarily have a profound influence in the way the market for these two commodities behaves.
The excitement over Chinese infrastructure news will be quickly over, with brokers mulling over the sustainability of ore prices in the context of weak fundamentals of the world steel industry. According to World Steel Association, Chinese steel production at 419.46 mt till July 2012 was up 2.1 per cent y-o-y. What, however, remains in the back of every broker’s mind is a statement issued earlier by China Iron and Steel Association that it is “highly probable” that this year, for the first time in 31 years, the country might have nil or negative growth in steel production. Announcement of some major infrastructure projects by China is fine, but as Financial Times quotes a broker as saying: “We don’t know in what way these will become real demand in steel markets. It is a question mark.” For the last many years, China virtually bought all the ore that India had on offer. This explains why any Chinese move is so closely watched by our ore exporters.
Price improvements in the last few days have come as a pleasant surprise for them. They, however, find the development somewhat intriguing, for when earlier this year the Chinese central bank cut benchmark interest rates on two occasions and Beijing flagged off some major projects involving potentially large use of steel, these did not lead to demand improvement for ore. A fall in Chinese steel prices by a quarter so far this year and profits of steel mills plunging nearly 50 per cent in the first half show dimness of steel in the mainland. But what then could be the consideration for Chinese mills to step up steel production on a base already hugely large? FT thinks it is “because many state-owned mills are incentivised to maximise revenues instead of profits. Revenues from steel mills mean more tax revenues for the local government, their ultimate owners.” In fact, it is because of some local governments looking the other way that China’s progress in weeding out technologically obsolete and polluting steel capacity is less than satisfactory.
No doubt, brokers have drawn some inspiration from China’s imports of the mineral rising 5.7 per cent in August to 62.5 mt making a total of 486.68 mt for the first eight months. At the same time they think ore shipments to China will fall this month from the August level in the face of steel mills contending weak demand and low prices of the metal. What will also not allow ore prices to climb easily from here is the accumulated mineral inventory of over 100 mt at 25 major ports in China. Instances of Chinese mills walking away from supply contracts with miners, including a few from India show the underlying market weakness. Ore market may, however, start behaving better in the fourth quarter when traditionally Chinese mills build up stocks ahead of freezing winter weather causes major dislocations in port operations. Could there be any upside for ore when the global demand for steel remains lukewarm? The median of estimates by seven analysts that Bloomberg spoke to is that ore may trade at $148 a tonne in the next quarter. Not many brokers will stick their neck out on this. What needs to be factored in is that the ore market will remain oversupplied in the near term.
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