China's June PMI raises hopes of Indian iron ore exporters

Exporters will have to compete hard to win back the market they lost in the wake of the mining ban

Why should Indian iron ore exporters be excited that China’s manufacturing sector did better in June than polls of experts suggested? The simple answer is, the principal destination of this country’s exports of iron ore, mostly fines is China. In a major surprise, China’s official manufacturing purchasing managers’ index (PMI) for June was up to 51.7 from 51.2 in the previous month. This is against Reuters poll forecast for 51.
 

China’s June PMI scaling unexpected high has been supported by both rises in new export contracts and improvement in domestic demand. 

Prices for both segments improved for the first time since December. This shows downward price pressure for producers of manufactured goods has begun to ease. Of particular relevance for our iron ore exporters or for the peer community in Australia and Brazil is the sub-sector Chinese steel industry’s index, which though eased to 54.1 in June, was well above cut off point of 50 that signals expansion.

Many, however, rightly have some reservations about the official PMI since it covers the large companies, mostly obtaining in the public sector. The signals about the economy emerging, therefore, may not necessarily be authentic. This will not be said about the privately compiled Chinese Caixin manufacturing PMI where the poll based on responses from about 430 purchasing managers is well representative of medium and small units. Here, too, in the private Caixin survey, the PMI at 50.4 was at a three-month high of 50.4, rising from an 11-month low of 49.6 in May. Like in official PMI, Caixin PMI beat Reuters poll forecast for 49.5.

The two indexes are definite pointers to rises in consumption of all ingredients such as iron ore and metallurgical coal by the Chinese steel industry, which has half the share of global production of the metal. What the indexes say about the working of steel mills in China also hold good for aluminium where the country makes more than half the world’s silvery white metal. In both iron ore and bauxite, the principal raw materials for steel and aluminium making, the country is heavily import dependent.

China consumes over 70 per cent of the world’s seaborne iron ore estimated at 1.4 billion tonnes (bt). 

As it is using more and more ore of foreign origin, the domestic production of the mineral shrank progressively to about 125 million tonnes (mt), converted to the standard 62 per cent iron (fe) from very poorly fe enriched locally available ore. Precisely for the cost involved in washing and beneficiation to make the mineral ready for use in blast furnaces, iron ore production in China makes business sense only when the mineral commands very high prices. In 2016, China’s ore imports at 1.024 bt were up 7.5 per cent from a year earlier. Imports of 444.52 mt in the first five months of 2017 have also remained ahead of last year’s corresponding period.

RK Sharma, secretary general of Federation of Indian Mineral Industries (FIMI), says decanalisation of iron ore exports in mid-1996 created ideal condition for India to make the best of surge in Chinese ore imports since 2000. The high points of Indian ore production of 218.55 mt and exports of 117.37 mt were in 2009-10. But then giving in to sustained high-pitched lobbying by steelmakers that the resource, fines or lumps must not be exported and kept for value addition locally in future, New Delhi in two phases raised export duty on fines to 30 per cent in December 2011 from 5 per cent in February 2011. The move highly resented by China made India origin fines globally uncompetitive.

As if relentless waves of resource nationalism that hit Indian iron ore industry were not enough, it faced many court related production restrictions and ban on exports from mines in Karnataka. The inevitable by way of exports collapsing to 4.50 mt in 2015-16 happened. The sector was in disarray. Mining companies sank deep into the red. Thousands of jobs were lost.  Revenues for the government from the sector sank. Finally, in the budget for 2016-17, New Delhi extinguished export duty on both fines and lumps with fe content below 58 per cent. Helped by the concession, Indian exports climbed to 28 mt last year, which, however, were nearly 90 mt less than the 2009-10 peak.  

Indian exporters will have to compete hard to win back the market it has lost. The global ore market is facing a glut, thanks to supply coming from newly developed properties such as Roy Hill’s 55 mt capacity operation in Pilbara region in Australia, Anglo American’s Minas Rio and the biggest of them all Vale’s S11D property in Brazil. On top of all this, will come the investment by Anglo-Australian Rio Tinto to develop its Koodaideri iron ore deposit in Western Australia. The deposit is likely to have potential to supply 70mt of ore a year. China is the reason for the world’s big resource groups to commit billions of dollars to open new mines and expand the ones in operation.