Indian steelmakers frustrated by local refusal to match global price cuts

Indian steelmakers without captive mines are distraught that local iron ore extractors, including the state-owned NMDC and Odisha Mining Corporation (OMC) — which sell the very major part of their production in the domestic market — have remained stubborn in refusing to take a price cue from the global market, writes Kunal Bose.

NMDC, the country’s largest producer of the steelmaking ingredient, has not felt the compulsion to revise the ex-mine price of the 64% iron (fe) content ore since March in disregard of steep falls from the 30-month February peak in the price of the globally benchmarked 62% fe rich variety. At the same time, local buyers had in a way registered their protest against ore disposal policy of OMC when in the last round of e-auctions of lumps and fines they did not bid for the major portion of the mineral on offer because of high base rates. Private sector ore producers arrive at ore prices through negotiations with buyers where also the former dictate terms. No wonder then that the

Indian steel ministry wants all iron ore to be sold in auctions, separately for steelmakers and traders.

Reacting to the disposition of mining groups, a steel industry official says the refusal to bring domestic prices in alignment with what obtain in the world market at a given point stems from the belief of ore producers that since only the shore-based steel, direct reduced iron (DRI) and pellet manufacturers could profitably support a portion of their capacity utilization by using ore imported mostly from Australia, they will in any case have a big domestic market at their disposal. This, more than anything, will explain why in spite of around 150mt (million tonnes) of ore lying at mine heads, miners are found unrelenting when it comes to fixing prices.

It will be recalled that, in the wake of Supreme Court- ordered ban on mining in Karnataka and Goa since replaced by caps on extractions and restrictions that obtained in Odisha and Jharkhand, the country became a net buyer of foreign-origin iron 

ore in 2014/15 with imports amounting to 12.09mt against exports of 6.12mt. In the following year too, the trade pattern remained identical with imports at 7.09mt being ahead of imports by 2.59mt. Imports were done mostly by converters on the western coast. The available infrastructure and logistics cost are not supportive of steel plants located far away from ports using imported ore. Indian private sector ore producers continue to take full advantage of the situation.

As Indian iron ore production is returning to normal with the mining industry putting its house in order under the watchful eye of state authorities, exports climbed to 28mt in 2016/17 when imports were down to less than 5mt. Production did climb to 180mt. In the meantime, the Supreme Court is being petitioned by Karnataka and Goa governments to allow the two states to progressively raise production of iron ore without causing disturbances to the environment. With the onset of monsoon, Goan production will remain suspended until September.

Explaining why in the first place the import price of benchmark 62% ore at China’s Tianjin port rose from the lowest on record on 24 November 2015 since the SteelIndex began tracking the spot price in 2008 to ZAR 1,232 in February, a 30- month peak, the official quoted earlier says global investors then put their bet on Beijing’s stimulus for infrastructure and construction development and rising steel production in the country in the face of edict to shut inefficient and polluting capacity. No doubt, China, much to the surprise of the rest of the world, has kept to the schedule of scrapping environment- degrading steelmaking capacity in the past two years. But there is the caveat that whatever capacity was finally shed was already non-working. For record, China, which owns around 1.2bn tonnes of steel capacity scrapped 65mt in 2016, running ahead of 45mt target by more than 40%.

What is even more encouraging for the world steel industry to learn is that China, which left itself with wiggle room to eliminate capacity between 100 and 150mt by 2020, is now aiming at near the top of the range with a target of 140mt. Anything that has got to do with improving the prospects for steel prices will have positive fallout for iron ore and other steel making ingredients. While that may be the case, iron ore or metallurgical coal has its own dynamics working in moving prices. The Beijing-inspired merger of Baosteel Group and Wuhan Iron and Steel into Baowu Steel Group has too given a shot to scrapping of ageing low-productivity machines. Expect

further consolidation in the Chinese steel industry which alone accounts for half the global surplus capacity of over 600mt.

Since China accounts for about half the world production of steel, it is only natural that long-term business strategies of leading global producers of iron ore will be influenced in a major way by their perceptions of how Beijing strikes a balance between maintaining stable economic growth and defusing debt risks and pushes through reforms of the steel industry. Commitments of billions of dollars of new investments in opening of new mines and expanding the ones in operation by Vale, Rio Tinto, BHP Billiton and Fortescue earlier this decade were based on perceptions that China would be the destination of all incremental production. It was also believed that economic consideration will lead to rapid closure of very high- cost mines in China. In the last four years of tumult in the world steel industry marked by low demand and low prices, major miners have slashed capital expenditure in a major way. This has left investors in shares of Rio and BHP somewhat confused.

Because of large fresh investments in mines development, particularly in Western Australia but also elsewhere, the industry now has to contend with a global glut in iron ore. This was worsened due to fresh supplies coming from newly developed properties such as Roy Hill’s 55mt-capacity operation in Pilbara in Australia, Anglo American’s Minas Rio and the biggest of them all Vale’s S11D in Brazil. On top of all this, will come the investment by Anglo-Australian Rio to develop its Koodaideri iron ore deposit in Western Australia. The prefeasibility study has established the project’s potential to dig out 70mt of ore a year and a 170km rail link to the main line. Actual project implementation to start in 2019 is intended to replace the ageing relatively high cost mines.

In a statement Rio Tinto iron ore CEO Chris Salisbury says: “We remain firmly focused on our value over volume strategy and maximizing returns through enhanced productivity. We are examining the Koodaideri project as an option to help us maintain our low cost competitive position and assist in maintaining the Pilbara blend product quality.” Not only is the market to embrace in iron ore supply deluge, the big producers are steadily lowering the cost of mining. They are credited with production cash cost at well below ZAR 260 a tonne. These two will then be considered the principal risk factors that may tug iron ore prices lower at any point even when the outlook for steel remains good. 

Those in the business of iron ore price forecasting find themselves on a treacherous ground. Who could have thought that the bear market in the commodity would be over in three months. A smart rally began coinciding with the start of the year’s second half. This happened as steel mills in China re- entered the market to replenish ore inventories with better grades of ore. The pickup in physical tenders suggests a real tightness. Two factors played out strongly in the rally that took the benchmark 62% fines from one-year low of ZAR 693.01 to $ 844 a tonne in July first week. First, the mills well anchored in profit zone wanted to be adequately stocked up with high quality ore. Second, the country’s official manufacturing purchasing managers index going up to 51.7 in June from 51.2 in May is an indication of the economy’s strength. This is against Reuters poll forecast for 51. The steel industry’s index eased to 54.1. But that is still above the cut off point of 50 that signals expansion.

Port inventories of iron ore in China at any point are fairly well collated. But mill inventories can only be guessed. In recent weeks, inventories at 33 major Chinese ports fluctuated between an unusually high 136mt on 19 May, making a bearish impact on the market and 120mt now. Chinese steel production in the first five months up to May rising by 4.4% to 347mt will explain why iron ore imports in the corresponding period were at an elevated level of 444.52m tonnes. Last year the country, which has a share of over three quarters of global seaborne trade in iron ore, raised imports by 7.5% to 1.024bn tonnes. What is not to be lost sight of is that some imports by China  are speculation based and iron ore is also used as collateral for bank loans.

Some analysts believe that even if Chinese steel production grows at 4% for the rest of the year that will not be found enough to take care of the additional ore coming out of the newly developed mine properties. Goldman Sachs says in a recent report that supply abundance will exert enough pressure to bring the average ore price realization to ZAR 610 a tonne in 2018. On identical consideration, Citigroup sees a likelihood of prices caving in to $40s next year.

What further lends credence to medium and long-term bearish outlook was the unaccounted India factor. Recall the fact that the country with the world’s fourth largest resource at close to 32bn tonnes produced 218.55m tonnes and exported 117.37mt in 2009-10. But then a series of government actions discouraging exports, which rightly invited accusations of ‘resource nationalism’ and court interventions derailing production made India’s presence in the world market insignificant in subsequent years.

A steep fall in production and exports led to the derailment of the iron ore industry, including major unemployment and fall in government revenue and foreign exchange earnings from exports. In virtual admission of mistakes, the government in the budget for 2016/17 scrapped export duty on ore fines and lumps with iron content below 58%. But further concessions in export duty are needed if India is to find a place of honour in the world ore trade. 

Diversification key to success, says new Vale chief executive  

The new chief executive of Vale, the world’s largest exporter of iron ore, Fabio Schwartsman, says the company needs to diversify, as prospects get more complex, writes Patrick Knight.

Comments by Schwartsman, until recently chief executive of the Klabin pulp and paper company, who has just taken over as chief executive of Vale, Brazil’s giant ore producer, illustrate very well many of the problems facing iron ore both worldwide as well as in Brazil.

The price of ore has fluctuated between a high of close to ZAR 1,299 per tonne, to a low of about ZAR 519 this year and the price is predicted to continue to be volatile for the forseeable future. This is largely because of the uncertainty as to what economic policies the Chinese government will adopt. Worries about the sustainability of the model which has served that country well for many years, have caused concerns to rise.

The fact that Vale is now almost exclusively dependent on its revenues from the sale of ore, rather than from a wide range of activities, as it was in the past, is a matter of great concern, says Schwartsman. In recent years, about half the ore exported by Vale, and more than that for some other the other miners in Brazil as well, has been destined for China. As output at the latest workings at Vale’s super-efficient and low-cost Carajas mine increases, together with improvements to railways and at ports allow Vale’s exports to grow, it is anticipated that the share of Vale’s ore going to China will increase as well.

During the last century, of course,Vale did not only produce iron ore, as well as some nickel and gold, it was a leading player in all aspects of Brazil’s aluminium industry. It used some of the profits of these to plant hundreds of thousands of hectares of mainly eucalyptus forest, mainly for use by the pulp and paper industry, as well as for the pig iron industry, and it owned shares in several pulp mills. It was also a leading producer of fertilizer. Vale owned and operated a large fleet of ships, ran not only the state-of-the-art railways linking its mines in Minas Gerais state as well as Carajas to ports which it owned and operated, it also bought shares in other railways when they were privatized.

Virtually all these assets — apart from the lines which carry ore — have been sold off in the past few years, when ore prices have often been low, but when spending on expansion at the Carajas mine was at its peak, as have assets in other countries, such as coal reserves in Mozambique. This concentration has led Schwartsman to worry that too many of Vale’s eggs are now all in one basket. He has not yet given any indication as to which areas Vale might expand into. But because Vale’s financial situation has improved greatly in the past couple of years, decisions can be expected soon. At the back of Schwartsman’s mind, must be the fact that the supply and demand situation for ore is now very different from what it has been in the decades since the 1940’s, a period when large new markets appeared regularly to replace ones in decline. In the first period, demand from Europe was particularly strong, as numerous countries there set about re-building their shattered steel industries.

Japan emerged as the leading market at this time as well, and the ‘Asian tigers’ also became important customers for Vale. For several years, Japan was the leading market for Brazilian ore, and this resulted in Vale accumulating great expertise in logistics. This included rail and handling at ports in Brazil, and long- distance bulk shipping, including developing and building the largest possible ore carriers. This efficiency enabled Vale, whose ore — particularly that from Carajas — is of the highest quality so commands a premium, to compete with that with the large companies with mines in Australia, which are much closer to Japan than Brazil’s.

The fast and steady growth of China, which in the past 20 years has concentrated on building basic infrastructure — notably a network of long distance, high speed railways — as 

well as modernizing numerous large cities, which have become attractive to millions of migrants from the countryside, has explained the boom in ore exports of the past few years. But there is now no other underdeveloped country the size of China to emerge, and take China’s place as the leading market for ore, as China did with Japan. In fact, there are many reasons why the world market for ore is more likely to shrink than grow, and at the best to remain stagnant, while output of ore continues to increase. It is unclear at the moment whether enough high cost mines in China and elsewhere will shut down, leaving more space for the three to four low-cost giants, all of which have invested in new capacity in the past few years. It had been expected that mine closures would happen, but strong local political interests have often prevented this. It was also expected that the growth in China’s steel-making capacity would slow, but this has not happened either. Many analysts suggest this increases the risk of a major crash in the fairly near future, as indebtedness, and overspending of banks, are at dangerous levels.

The question as to whether the Chinese government will be able to take the sometimes tough measures which are called for, but which will force the economy to slow to a point that it becomes sustainable, rather than be forced to take emergency measures, is not yet clear. Because of the fear of unrest which might follow a severe downturn, when tough measures were introduced, might soon have to be reversed, pushing the problem into the future. In any case, growth of close to 10% a year, is unlikely to be seen again.

It also seems likely that a growing number of countries, will follow the example of the United States, and switch from relying on large blast furnaces, to using scrap as the raw material for making steel, rather than ore, to make steel. As the economy of a country develops, and large quantities of obsolete consumer goods start to accumulate, very large quantities of scrap start to build up as well. Other factors will involve changes in the pattern of energy use. As efforts to reduce pollution, and the risk of climate change become more of a priority, it seems virtually certain that vehicles powered by electric motors, rather than heavy internal combustion engines made largely of steel, will increasingly come to be used. An electric motor is much lighter than an internal combustion one, so far less steel will be needed to make it. The bodywork of future vehicles, will also be lighter as well. So the future of steel and iron ore by the motor industry, now a leading market, will be very different than it has been for the past 100 years.

Schwartsman, who was the first non-family member to head the Klabin pulp and paper company, and who had considerable success in raising the company’s profitability by giving greater importance to market pulp, rather than paper, also says he plans major changes to Vale’s organizational structure. At the moment, many different directors are housed in different buildings, so rarely interact with their colleagues. The new CEO wants them all to share the same building, which he believes will make the exchange of ideas easier.

Independent of what Schwartsman is planning, a lot is happening both at Vale, and elsewhere in the Brazilian ore industry. The new workings at Carajas started up 18 months ago, and this allowed 150mt (million tonnes), of the total 350mt Vale produced in 2016, to come from Carajas. The availability of so much top-quality ore, is allowing Vale to blend some of this with lower-grade ore from mines in Minas Gerais state, at the Tubarao terminal. Blended ore is embarked from there, or else at the terminals Vale now operates in Asia, so can be sold for a variety of prices. The workings at Carajas, will only attain full capacity in 2020, by which time Vale expects to be producing 400–450mt.

Anglo American is gradually raising output at its mine in Minas Gerais state, and hopes to produce about 17mt there this year. If all goes according to plan, Anglo’s output will leap to 26.5mt in the 12 months ending in December next year. The CSN steel company produced 37mt in 2016, 44% more than it did the previous year.

The increase in output byVale,Anglo and CSN means that the 25mt of pellets previously produced from ore mined by Samarco, jointly owned by Vale and BHP, but where production was halted in November 2015 following the bursting of a dam, is hardly missed. The date at which the Samarco mine will be re- opened, keeps being pushed back, and there are reports that BHP would like to leave Brazil, but problems of unpaid taxes are interfering.

It appears that after a long delay in allowing companies which have been awarded concessions to open workings, but have not yet done so, may soon come to an end. A total of 8,000 requests for concessions are being considered by the National Minerals Production Department, and it anticipated that 100 new concessions will be given the go-ahead this year.