Iron ore defies the odds
Tom Albanese, CEO of Vedanta Resources, gives his
views on the improving minerals market
Proving forecasters wrong, iron ore prices made
marked advances in 2016, though not as much as
metallurgical coal. In an interview with Kunal
Bose of DCI, Vedanta Resources CEO Tom
Albanese says the size of global ore inventories at
well above historical average, universal concern
over climate change and supplies from new mines,
particularly in Brazil and Australia will have a
bearing on price behaviour in 2017. Albanese says many
brokerages don’t see a runaway rally happening in iron ore this
Q: Iron ore defied price forecasts by major research groups to
register sharp price rises in 2016. Metallurgical Mines Association of
China says average seaborne iron ore price in 2017 will rise
moderately to over $60 a tonne. What is your price forecast?
A: On the demand side, steel production was moderately up
driven by Chinese stimulus. The most important factor was on
supply side like we saw with price increases last year in metals.
There had been contraction of high-cost Chinese iron ore
production despite last year’s dramatic price increases. On the
seaborne ore supply, production was ramping up in Brazil and
Australia but at a muted pace. Finally, surges in coking coal
prices put a large value-in-use premium on higher index grades
of iron ore. Lower grades like what we export from Goa in
India are not, however, seeing any marked rises in prices.
Q: How do you look at liberalization of Indian exploration policy and
new mines ownership coming through auction bidding?
A: New Delhi is enthusiastic about boosting the sector through reforms. The amendment to the Mines and
Minerals (Development and Regulation) Act that
allows transfer of captive mining leases not
granted through auction will boost natural
resources sector in the medium to long term.
Mergers and acquisitions in sectors that rely on
natural resources will benefit from the
amendment to the Act.
However, some legacy issues such as land ownership pattern,
quality of mineralization studies, small sizes of deposits put on
auction and end use restrictions are weighing heavily on the
mining sector. These need to be addressed. A pro-reforms
government in New Delhi and India’s ascending global stature
conjures up image of Australia during the 1970s, when the
natural resources industry was nascent in that continent. Today
that industry in Australia offers the best-in-class infrastructure
and use of low emission technologies. I believe India has the
means and the will to come Australia’s level quickly.
What further gives me confidence is New Delhi’s
reinvigorated hydrocarbons policy that encourages greater
private sector participation. As the regulatory system matures
and awareness spreads across communities and carbon neutral
technologies are introduced, the natural resources sector will
continue to evolve robustly with high levels of contribution to
the country’s GDP.
Q: The Indian iron ore industry had been through much tumult in
recent years with court-ordered mines closures. The rules of the game
then got changed because of the amendment to MMDR Act in 2015.
What will be your prescription to restore normal mines operation?
A: Prior to the ban, India was one of the world’s largest
exporters of ore. That coincided with a booming commodities
sector, with China principally driving global demand. But last
year beginning the world faced headwinds such as fears of a
China slowdown, sluggish economic recovery in the West,
concerns over growth sustainability in emerging markets and
surplus iron ore supply. In any case for over a year, the market
entertained fears of lower world metal demand on the back of
China entering a mature period in its materials consumption
But the fear sentiment that this generated disappeared when
Beijing introduced a stimulus programme in the second half of
2016. Liquidity flowed into infrastructure and real estate
sectors. In the process ore demand was reignited. Donald
Trump winning the US Presidential election convinced
commodity bulls of a rally in 2017.
As for India production caps have led to a fraction of the
quantum being produced before the ban. For example, a cap of
20mt (million tonnes) a year in Goa falls way short of
production that can be sustainably mined there. Our suggestion
to the government is to lift the cap gradually and introduce
checks and balances to ensure sustainable mining.
Q: But will not the bulls have to contend with global high inventories
of ore and commissioning of new large mines?
A: True, ore inventories are rising and these are at this point well
above historical average. Given this situation, a legitimate
question is to what further extent can spot prices climb. Then,
global concern over climate change will be an interesting factor
to watch out for. Some softening of ore prices of late is
ascribed to Beijing asking steel mills to stay shut till the smog
has cleared. The Chinese steel sector stuck with old
technologies has higher emission levels than its peers in many
other countries. Are we going to see Chinese industry making
mass transition to a new environment friendly technology or will
Beijing rest content introducing a stricter regime for steel mill
operation? Answers to these questions as they unravel will
decide the course of ore prices.
Q: What could be the impact of price improvement on ore output?
A: That there is a trickle-down effect of higher prices on ore
production is accepted. In the past couple of years the focus of
miners was to improve operational efficiency and cut costs to
weather low prices. This might now change to more action on
ore price improvement and demand supply outlook being less
overcast. Brazilian Vale’s $14.3 billion Eliezer Batista S11D
complex near Canaa dos Carajas in Brazil stands as an example
of how greenfield and brownfield activities in iron ore industry
may kick off. Miners in general are cautiously optimistic about
how ore prices will play out this year. While some brokerages
expect prices to average $60 a tonne, there are others who
dismiss the recent rally as a “fluke”. In any case they don’t see a
runaway rally happening in 2017.
Q: Aluminium is doing well with LME three-month price quoting over
$1,790 a tonne. Alumina prices too are up in tandem. How do you
see aluminium performing in 2017 and beyond? Where do you see
Indian aluminium capacity by 2030? Should India take alumina
abroad for smelting where power comes cheap?
A: Demand for aluminium has continued to be strong over the
past several years, as new applications are found for this
important metal. However, this demand growth has been more
than met by very rapid smelter capacity expansion in China in
particular. This has kept the white silvery metal in surplus, with
low prices. Hopefully capacity growth is moderating in China,
helped by rising coal and alumina costs. Another factor that has
reduced the stockpile is the price and availability of alumina.
Aluminium may see an upside in 2017 to factor in the rising cost
of raw materials. Increasing input prices such as that of caustic
soda will have a critical bearing on aluminium prices. Any
increase in green energy cess will add up to aluminium
manufacturing cost.
Alumina smelting in India is relatively expensive due to higher
cost of power and freight. However, to move smelting offshore
may not be rewarding, if one considers long-term dynamics.
Favourable trade policy such as increasing customs duty and
placing minimum import price on aluminium shall be
instrumental in protecting Indian producers of the metal. With
New Delhi promoting the natural resources sector,
attractiveness of alumina production in the country will grow.
The average per capita consumption of aluminium in India is
2.2kg against a global average of 8kg. That is a pointer to the
huge potential for aluminium consumption growth in the
country. With India remaining the fastest-growing major
economy in the world, aluminium use can only rise. India has
vast reserves of bauxite and that will prove handy in future
smelting capacity growth.
Q: Zinc has been one of the best-performing base metals in 2016.
Will this again be the case in the current year?
Q: In a rising base metals price environment in 2016, Zinc led
the way with a gain of over 70%. Zinc has a multiplicity of
industrial applications and its demand is linked to global
industrial production and GDP growth. Considering that China,
India and now Brazil are chugging along at a fair speed, the
demand for zinc will remain steady. If the US infrastructure
ramp up moves forward according to Trump’s plan, that would
give extra fillip to zinc prices.
But what has clearly come out of zinc’s track record over the
years is that supply will decide prices to a large extent. A
number of large zinc mines closed during 2015/16 as reserves
were exhausted or operational costs became too high. It will be
hard to replace this lost production.
Most analysts are predicting strong zinc prices for 2017.
There is a chance for significant further price improvements.
This may, however, be self-defeating as it could become a catalyst
for new supply. This may make any such rally short-lived.
Q: What exactly has triggered the turnaround in commodities —
minerals and metals — when the IMF has cut global growth forecast
by 0.1 percentage point to 3.4%? The IMF says the Brexit vote
implies a substantial increase in economic, political, and institutional
uncertainty, which is projected to have negative macroeconomic
consequences, especially in advanced European economies. Your
A: Yes, global GDP estimates have been recently tempered
downward. But at the same time the US and China will both
see synchronized growth for the next few years. This is to
happen for the first time in over a decade. While the UK and
EU economies may suffer some uncertainty, it won’t be enough
to significantly reduce overall global metals demand. The main
story for metals will happen on supply side. After years of
sharply reduced capital spending, surpluses are turning to deficits
and metal inventories are beginning to fall. It will be hard to
reverse this macro sector-trend.