Till the end of FY20, no hikes in iron ore prices are expected as the domestic market will continue to remain oversupplied. Merchant iron ore producers whose leases are scheduled to lapse by March 31, 2020 are looking to maximize output. Odisha has 16 operative merchant mines whose leases expire by then. The mines add up to 80 million tonnes in approved capacity. In FY19, Odisha produced 114 million tonnes (mt) of iron ore, accounting for more than half of the country's estimated production of 207 mt.
Also, with international iron ore prices slumping to six-month low of $87 per tonne on Wednesday, domestic miners are faced with increasing pressure to cut prices. State run NMDC
Ltd, the biggest iron ore producer, has cut prices of iron ore lumps by 9.6 per cent to Rs 2900 a tonne and that of fines by seven per cent to Rs 2660 a tonne. The revised prices are effective August 20.
Post March 31 2020, the iron ore prices are expected to climb depending on outcomes at auctions of iron ore blocks.
While integrated steel producers will be insulated from the price hike due to captive supplies, the price which their non-integrated producers shell out will be 2.6 times, a previous study by CRISIL Research showed. The existing integrated steel companies
such as Tata Steel and central public sector enterprise SAIL will be immune to price flare-ups and hence, would not face cost pressures. By contrast, the new integrated steel players like JSW Steel who have won new iron ore leases at high bid premiums over the last two years will grapple with 5-8 per cent hike in iron ore costs over what they previous purchased from the merchant producers.
When iron ore auctions first took off in 2015-16 after the framing of Mineral Auction Rules 2015 pursuant to the amended Mines and Minerals- Development & Regulation (MMDR) Act, 2015, the bidders placed high stakes on the blocks offered at online auctions to ensure a long-term iron ore security for smooth running of their steel units.
For non-integrated steel producers, iron ore costs have 11-15 per cent share in the cost of production. Elevated ore prices during FY21 will narrow their Ebitda (earnings before interest, taxes, depreciation and amortisation) by 300-400 basis points, CRISIL estimated.