Iron ore, as the commodity influencing trade dynamics is back in focus. 2016 has been a witness to resurgence in iron ore’s fortunes; both vaulting prices globally and spike in production domestically are pointers to its regained appeal. Globally, the recent rally surrounding iron ore is unprecedented – its price settling at a breath below USD 78/mt a tonne in a volatile trade after touching a high of USD 80/mt earlier this month.
Strong iron ore price movements fueled by China’s stimulus and an underpinning optimism with the election of Donald Trump as the next US President has augured well for the prime steel making ingredient. The short term outlook is positive. Investment banker Goldman Sachs has raised its three month price forecast for iron ore at USD 65/mt.
In India too, things are looking up for iron ore. Production in the first half of FY17 (April- September) has touched 84 mnt, 26% higher than the corresponding period of last fiscal. Odisha, the largest producing state has contributed 42 mnt to this output and is eyeing production in excess of 100 mnt by fiscal end. Given the current production tempo, iron ore production nationwide would most likely reach its projected figure of 180 mnt in FY17, substantially improving upon output of 155 mnt in FY16.
Iron ore export is going through a purple patch. Data by the Indian commerce and industry ministry shows exports have bounced back to log 7.5 mnt in April-August. This comfortably surpasses 5.54 mnt of iron ore shipped abroad in the whole of 2015-16. Bolstering international prices have made exports a favorable deal for the Indian miners. The Indian government’s step to lift 30% export tax on low grade ore in this year’s budget has also incentivized exports, especially from Goa. Federation of Indian Mineral Industries (FIMI) has been lobbying with the government to remove the duty on high grade too, pointing to the growing stockpile of iron ore at mine heads.
Upon improved availability of iron ore in the domestic market, imports are on a downtrend. At the end of August, imports were only 1.59 mnt compared with 7.09 mnt in FY16.
This doubtlessly is a remarkable recovery for iron ore after a phase of tumult that started around 2013. It was a period when scams had sullied the iron ore sector, a key driver to economy of ore rich states like Karnataka, Goa and Odisha. A decade prior to this phase was a boom for iron ore exporters who reaped supernormal profits. But when excess, unregulated mining took the proportion of scam, the government swung into damage control mode. The MB Shah Commission of enquiry was appointed in 2013 to probe into instances of large scale, illegal mining in Karnataka, Goa, Jharkhand and Odisha. This also coincided with the probe by the Supreme Court appointed central empowered committee (CEC), a double whammy for the miners. The protracted investigation hurt the big merchant miners in these states alike. Triggered by the judicial probe, lax administration in the state turned stiffer on mining operations with the process leading to a temporary shutdown of scores of leading mines, especially, the iron ore and manganese leases.
Iron ore production in the country tanked to a multi-year low in 2012-13 at 135.8 mnt, down from the peak levels of 218.5 mnt in FY10 and 208 mnt in FY11. Karnataka and Goa were the worst sufferers from FY10 to FY14.
Karnataka’s iron ore output plunged from 43.2 mnt to 17 mnt during this period. The Supreme Court had banned all 168 iron ore mines in the state in 2011 for statutory violations and later, lifted the restriction in 2013 for 117 mines. Goa, which had 38 mnt production in FY10 drew a blank in FY14 being severely hit by the mining ban.
The glimmer of hope for iron ore mining came with the election of Narendra Modi led government at the centre. This turnaround is attributed to a path breaking legislation in the form of the amended Mines and Minerals Development & Regulation (MMDR) Act, 2015. The Act had an enabling provision to extend the validity of mining leases which were operating illegally under the provisions of ‘deemed extension’ delineated in the previous version of the act. As states passed swift orders to extend validity, numerous mines resumed activity, boosting production.
The fall out of the policy intervention has showed up in output. After contracting 20% in 2011-12, 19% in 2012-13 and 15% in 2014-15, iron ore bumped into the positive territory in 2015-16 with a growth of 8%. Mining, driven mainly by iron ore, has 14% weightage in the Index of Industrial Production (IIP).
From the policy prism, the other game changer is the introduction of auctions for awarding mineral blocks, putting discretionary allotments to history. As more iron ore mines get allocated through auctions, it would ensure a transparent, seamless addition to production. And, waiting to be reopened are several more mines whose operations were turned off by the Supreme Court.
Iron ore reversing to its previous highs in output augurs well for the end use industries and economy at large. A robust production would help overcome the off balance in demand and supply scenario, a win-win recipe for the miners and their consumers. The mines ministry is eyeing 1% hike in mining contribution to GDP, and iron would play a pivotal role in it.
Source: Steel 360 Magazine Dec’16 Issue