Establishing Confidence Barometer for Iron Ore Exporters in India: Aftermath of 3 years hiatus coupled with radically altered markets on offer

After three years of impasse on mining and exports of low grade iron ore in India, the recent developments of revival comes as a respite for the industry. With Vedanta Ltd, India’s largest miner emerging as the lead in shipping its first iron ore export cargo of 80,000 tonnes to China’s Hebei’s Province in October 2015. However amid this buzzing course of re-gearing mining activities lies the striking reality for Indian iron ore exporters. The underlying fact of India being the world’s third largest iron ore exporter till 2010 has lost its sheen with country losing its prominence to the mining giants of Australia and Brazil in the span of three years ( Refer exhibit 01).It is said that rehabilitation issues persists for long, especially with radically altered markets to offer the prospects it becomes even more challenging for Indian iron ore exporters. The challenge of weakening iron ore demand of the worlds largest consumer China coupled with plunging of the price of commodity to 58 USD/dmt in first half of 2015, sustenance is surely a concern as the prices are to follow a nearly straight line curve till 2020 (Refer Exhibit 02).

Comparative Analysis of World Iron Ore Exporters-eninconperspectives.comIron Ore Price Forcast-eninconperspectives.com

 

Historically China fueled the global iron ore export volumes but with sluggish demand what lies ahead Indian iron ore exporters- A Reality Check ?

Iron ore which is primarily used for steel production has found its obvious place in one of the world’s fastest growing economy China grabbing the dominant chunk of imports (Refer Exhibit 03).The interim effect of rising iron ore consumption has made its steel production levels crossed 800 million tonnes mark in first quarter of 2015 thereby contributing 49% of global crude steel production (Refer Exhibit 4).

Comparative Analysis of World Iron Ore Importing Countries-eninconperspectives.com

Country Wise Crude Steel Production Share-eninconperspectives

 

 

 

 

 

 

However following the strong growth over a decade, China’s steel demand growth has slowed down and turned negative in 2014. As per the Australian mining giant, the apparent steel demand in China has fallen 6 percent year over year in first Quarter of FY-15, primarily due to destocking, the softening of property sector and a slow down in manufacturing sector. So what  Chinese steel mills are now facing is the fierce heat of competition squeezing their profit margins with global supply glut in steel with plunging prices in the market. On combining the effect of all these, we have the preposition of these loss making Chinese steel mills emerging as potential buyers of iron ore bent on slashing cost and crunching hard to sustain their production rate. However a further plunge in Chinese steel profits and a decline of about 5-8% in domestic steel demand may force many of the nation’s steel mills to close or consolidate, removing exports from the global market and allowing prices to begin to recover.

So whether the demand of low grade iron ore in China last for long next to be examined. As per enincon’s analysis (Refer Exhibit 05) the lower apparent steel use per capita in emerging economies suggests the strong potential for increasing steel demand outside of China. Steel production growth is higher in emerging economies with higher real GDP growth rate most of which lies in Asia. With ASEAN leading in the real GDP growth rate even higher than the world average present significant potential for growth in the steel intensity per capita however the pattern of growth by in iron ore demand varies as per the country. So it will be interesting to identify the new prospects for iron exports in South East Asia.

Steel Use per Capita vis-a-vis Real GDP growth rates

Identifying top four Indian iron ore export destinations in South East Asia 

The main parameters for identifying the iron ore export destination need to qualify on three parameters iron ore import demand, favorability in terms of landed costs and proximity to Indian Coast. Based on these factors as per enincon’s analysis (Refer exhibit 06) the top four iron ore export destination for India come out to be Malaysia, China, Indonesia and Philippines. However, it requires due diligence as impending challenges of higher export duty and capping on export volumes to 20 MT still persists in India.

Top Iron Ore Export Destinations for India-eninconperspectives.com

To capture the market share exporters need to evaluate of adequate pricing, proximity to port and demand of the end consumer as well. Coupled with the fact that there lies fierce competition by large mining companies persists coupled with new greenfield projects coming on line, key lies in having low cost of production. So whether the brimming  prospects of growth in these potential export destinations are fructified can be answered only in the due course of time.

*The views expressed in this article are solely those of enincon perspectives and do not necessarily represent those of Enincon LLP.

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