Iron ore may stay elevated with robust Chinese demand, supply disruptions

Since Feb 2020, when Covid-19 was at its peak in China, prices of international iron ore skyrocketed by over 75% to a seven-year high of over $150 a tonne

iron ore, mining, steel, iron, mines, metals
Next fiscal, domestic iron ore prices are expected to rise further
Ishita Ayan Dutt Kolkata
5 min read Last Updated : Dec 22 2020 | 10:11 PM IST
The red-hot rally in iron ore prices may continue into the new year with Chinese demand going strong and disruptions in supply –globally and in the domestic market.

Since February 2020 when the Covid-19 was at its peak in China, prices of international iron ore – a key input material for steel – skyrocketed by over 75 per cent to a seven-year high of over $150 a tonne with a surprising resurgence in the economy there.

The rebound in China has been better than expected. World Steel Association, which represents 85 per cent of global steel production, had projected a one per cent rise in China's steel demand in 2020 in June, but revised it to 80 per cent in October. Growth in demand, it said, was aided by government infrastructure stimulus and a strong property market. 

Though the ferrous raw material has seen a sharp turn in the last 7-8 months, it’s a trend that has been in the making the past two years; global iron ore prices have risen from $70 a tonne in 2018 to $94 in 2019 to $105-$110 in 2020.

“This surge in prices was largely driven by a healthy demand from China amidst supply disruptions at iron ore mines. Despite Covid, global iron ore prices have remained elevated on the back of a sharper than anticipated revival of demand in China along with Covid induced supply disruptions in Brazil and South Africa mines,” said Isha Chaudhary, director, Crisil Research.

Domestic prices and shortage

In the domestic market, however, the trend is more recent, led by a revival in demand coupled with supply issues brought about by auctions in Odisha where bidding took place at huge premiums. 

The major increase in prices in the domestic market has come in the last 7-8 months. NMDC has increased prices of lump ore (65.5 per cent) from Rs 2,650 a tonne at the beginning of April to Rs 5,200 a tonne in December and fines (64 per cent) from Rs 2,360 to Rs 4,610 a tonne. 

Icra and SteelMint data show that market price of Odisha (63 per cent Fe fines) inclusive of royalty, DMF (District Mineral Foundation) and NMET (National Mineral Exploration Trust) was at Rs 1,900 a tonne as on April 4, which rose to Rs 6,350 in December; excluding royalty, DMF and NMET, it moved from Rs 1,586 to Rs 5,301 in the same period.

The Odisha auctions haven’t exactly turned out as intended. Jayanta Roy, senior vice president, Icra, said some of the bids in the iron ore mine auctions in early 2020 were clearly very aggressive and without much economic rationale, which seems to have led to lower production of iron and therefore a shortage in ore availability.

A total of 19 iron ore mines were auctioned in Odisha in 2020 amounting to 30 per cent of India’s total iron ore production in terms of volumes. 


“Only seven of these mines have been operational, albeit at lower utilisation levels leading to the shortage faced in the market. While another three of these mines have been surrendered by the bid winners, the remaining nine mines are yet to begin operations in next quarter,” said Chaudhary.

According to an ICRA analysis, the supply shortage in the current fiscal could be over 50 million tonnes and expects the shortage scenario could persist for the next 6-9 months. 

In 2019-2020, iron ore production was 242 million tonnes and consumption by steel industries around 180 million tonnes.

What is the making the mines unviable is the premium quotes at the Odisha auctions. The highest premium quoted was about 154 per cent; levies would add another 30 per cent and all this is over the Indian Bureau of Mines (IBM) price.

The shortage of iron ore and increasing prices has become a rallying point with steel producers demanding a temporary halt in iron ore exports.

R K Sharma, secretary general, Federation of Indian Mineral Industries (FIMI), however, contended that 82 per cent of resources auctioned were cornered by captive miners and primary producers, so where is the shortage. 

Uptrend to continue

According to Chaudhary, domestic prices are likely to increase by 15-18 per cent in the current fiscal (2020).

Next fiscal, domestic iron ore prices were expected to rise further. Chaudhary attributed it to production ramp-up by auctioned mines (acquired at a high premium in the last fiscal), to a healthy recovery in domestic demand over a low base in current year and export opportunities as global iron prices stay elevated.

Global iron ore prices were expected to maintain the trend with some downward pressure at $90-$100 a tonne. “This would be led by gradual ramp up in production of iron ore especially in India, Brazil and South Africa,” Chaudhary said.

Topics :Iron ore pricesIron ore demandiron ore mining

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