Iron ore prices were stable throughout the last week due to very thin transactions. The Chinese steel makers are hit with severe liquidity pressure. The higher iron ore prices have dented the profit margin of steel makers considerably as they were not able to en cash the higher steel prices for the past couple of months. The Chinese steel makers wants the iron ore prices to be at much lower levels for better margins, but the current supply shortage can strongly resist any downward movement of iron ore prices. Even though the plant inventories has been running quite low for the month of July and August, The Chinese steel makers have been quite soft on the purchases for the current quarter with the expectation of a lower iron ore prices and extremely tight liquidity from the bankers. In order to curb the inflations, Chinese government had tightened monetary policy which has kept the mill’s purchase power at minimal levels.
Despite the fresh transactions being nominal, the iron ore prices surged more than 10% for the last couple of months.
The Indian steel ministry has proposed a further hike in export duty aiming to protect the resources for the domestic usage. The move, if implemented can have severe implications to the iron ore export companies. The severe shortage of iron ore from the mines has kept the miners price at high levels.
The transporting cost at peak levels and duty being at current 20%, the margins are already tight for Indian exporters. The current fiscal year exports have been severely hit because of the non availability of material. A further hike in export duty will reduce the export margin further which will prompt many traders to exit the market as the huge investment involved will fetch only a nominal margin for them. There will be very little room left to accommodate the risk associated with transporting bulk commodities.
If further export duty hike is aimed at protecting the natural resources, then it won’t serve the purpose completely as the iron ore fines, which is exported, is still not widely used in India. Very few plants have the capacity to use the fines. Fines, which is a byproduct while crushing the ore, can be highly hazardous to the environment if not utilized properly.
The recently launched iron ore futures contract, which is traded in Singapore Mercantile Exchange, has been traded in very tight range of $180 to $182 CFR per metric ton for 62% grade Fe. The volume is steadily picking up with higher market participations. The iron ore future contract provides a hedge mechanism for the physical iron ore market. With the global economy expected to be quite shaky for the coming years, the iron ore price movement can be quite sever. In such scenarios, the future contract will act as a perfect hedge to reduce the inherent risk for buyers and sellers. The iron ore prices have seen severe corrections during the 2008 global recession period, which has put many market participants in deep trouble. The iron ore prices fell from $190s to $60s in a very short span when the recession hit the globe in 2008.
If the US and European economy does not find stable grounds to stabilize the financial market, the iron ore prices can have intense fluctuation. A proper utilization of the future contracts by the market participants can minimize the profit volatility.
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Complied by Praveen Kumar, Chairman, Maya Iron Ores