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Foreign miners are a little surprised that India, enormously rich in iron ore, is becoming a major importer of the steel-making ingredient. The country could end up importing up to 15 million tonnes (mt) of ore this financial year, with JSW Steel alone bringing in six mt of foreign origin mineral, equalling 20 per cent of its annual requirement of 30 mt.
No wonder, then, that Sam Walsh, chief executive of Rio Tinto, the world's biggest and lowest-cost producer of iron ore, finds it bizarre that "we are starting to export ore from Australia to India. I know India has sufficient reserves" to take care of its growing demand.
Incidentally, Rio has been pursuing for a very long time an iron ore mining project in Odisha, which has 33.9 per cent of the country's iron ore resource of 28.52 billion tonnes (bt) as it awaits an "early approval" of a long-standing proposal to prospect and mine diamonds in Madhya Pradesh.
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In its dogged pursuit of the two projects, Rio has had many frustrating moments. Walsh believes that as the Narendra Modi government is committed to ending the "red tape regime," Rio's two projects should now see the light of day. "We are patient, we have a long-term perspective," says Walsh.
India could draw some consolation that imports are occurring when iron ore has chalked up two straight quarterly losses. In an interview with Bloomberg TV, Walsh predicted ore prices would remain at about "$100 a tonne after falling from artificially-high levels".
Earlier, supply disruptions in India sent the price of spot Australian benchmark to $185 a tonne, including shipping costs, in January 2011. The medium-term price forecast is not deterring the likes of Rio, BHP Billiton and Vale from building new mining capacity. Walsh believes ore prices of $100 a tonne are "truly sustainable."
"We're also bringing in additional capacity, which will help continue the improvement in our profitability."
R K Sharma, director-general of the Federation of Indian Mineral Industries, says: "A series of wrong policy moves by the United Progressive Alliance government led to the collapse of our iron ore production from 226 mt in 2009-10 to 140 mt in 2013-14. Our exports during this period were down from 118 mt to 15 mt. We have created room for the world's leading mining groups to build new capacity and sell more ore in the world market."
Sharma says China will remain the single-most important determinant of prices of iron ore. It alone is responsible for two-thirds of the 1.2 billion tonnes of sea-borne trade in the commodity. Not that the world's second-largest economy does not have significant iron-ore resource. However, much of Chinese ore has iron (fe) content of 25 per cent or less. The poor ore quality not only makes extraction expensive but to make the mineral useable in blast furnaces it requires thorough washing to remove gangue, which further adds to the cost.
Most of Chinese iron ore production of 1.5 billion tonnes in 2013, which on import equivalent basis became 340 million tonnes, will not find justification on commercial grounds. According to the Chinese National Development and Reform Commission, production costs of iron ore in China range from $75 to $145 a tonne. This compares very poorly with the break-even price of $44 a tonne for Rio Tinto, $53 a tonne for BHP Billiton, $68 a tonne for Vale and $77 a tonne for Fortescue.
A few weeks ago, the benchmark price of ore with fe content of 62 per cent fell below $90 a tonne for the first time since 2012. Prices have since recovered by about $8 a tonne. Low rates are leading to closure of the costlier Chinese mines in coastal provinces, which were starved of investment in mechanisation and new equipment.
Goldman Sachs is expecting Chinese ore production to fall 10 per cent over two years to 2015. But for the market to be balanced, JP Morgan Chase says China will need to trim production by 64 million tonnes in 2014 and a further 85 million tonnes by 2017. Making predictions about China is always a tricky business. In this instance, however, we have from China Metallurgical Mining Enterprise Association that many domestic iron ore mines had already been idled. Many more high-cost mines are also on the line. China watchers point out that mine capacity shedding would have been "decisive and faster" but for the fact that considerable volume of ore production is either state-controlled or vertically integrated with major steel mills, many of which again are state enterprises.
Hope, however, lies in Chinese President Xi Jinping's drive to shut uneconomic metal and mining enterprises across the board. Besides cutting losses, he wants cleaner environment. Bad mining practices are widespread in China. JP Morgan Chase considers Chinese iron ore capacity of up to 200 million tonnes sticky. Some agencies will be putting sticky mining assets in China at a much higher level. Whatever is the actual figure, Beijing will have to do a comprehensive house-cleaning job and that too fast enough to put its ore industry on an even keel.
