Rupee, firm demand to keep domestic iron ore prices elevated in near-term

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The rupee’s slump and strong demand from end-use industries will keep domestic iron ore prices elevated in the near term, unlike the trend in international prices.

A report from ratings agency CRISIL says the price in the country have been shored up by robust growth in demand and elevated prices of pellets, an intermediate product. Over six years, benchmark prices of 62 per cent iron ore fines abroad have remained $65-70 a tonne. But, domestic prices have risen 40-45 per cent over last year and this grade of ore trades at a 16 per cent discount to the landed price, compared with a 45 per cent discount in FY17 and 31 per cent in FY18.

An international report on performance of commodities by Natixis predicts iron ore prices would fall to an average of $58 a tonne and then remain flat through 2020, at an average of $56. “This is mainly demand-driven. We see steel-intensive activity slowing in China, leading to peak steel demand in the near future. China already has a large stock of iron ore and steel to absorb a capping regional price,” the report explained.

The price outlook in the domestic market is the reverse. Rahul Prithiani, director at CRISIL Research, says: “Domestic prices will stay elevated in the near term, led by opportunities linked to healthy demand growth, weak currency and rising pellet prices. However, prices will potentially correct (fall) by seven to nine per cent by next fiscal (FY20), led by a domestic supply surplus as merchant producers capitalise on peak production capacity before (ore mining) leases expire.”

Currency erosion in the past few months has contributed. While the global price of 62-Fe grade ore declined by 15-17 per cent between January and August this year, landed costs have declined by only three to five per cent. This has a bearing on the 62 per cent of crude steel production that is entirely dependent on merchant ore procurement.

According to the CRSIL report, the impact would be higher for induction furnace and electric arc furnace producers. Their cost of production rose 11-13 per cent during the first half of FY19, compared with four to six per cent for blast furnace or basic oxygen furnace producers (cost rise only attributable to rise in iron ore prices). However, steel prices saw a bigger increase (15 per cent rise in long product prices) over this period, riding on healthy growth in domestic demand; this helped offset the impact on profit.

High volatility in domestic iron ore prices, coupled with uncertainty around the regulatory structure has led to large steel makers bidding aggressively in recent auctions for the raw material.

“Of the 17 iron ore blocks auctioned as of August, 14 have been awarded to steel makers for captive usage. Once these mines ramp up, by FY21, 35-40 per cent of crude steel capacity will be self-reliant, compared with 27 per cent now. The share of captive consumption is expected to rise further with a number of iron ore leases expiring by 2020,” said Prasad Koparkar, senior director, CRISIL Research.

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