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Can India’s Iron Ore Mining industry make a comeback?

April 25, 2014
India’s Iron Ore Mining

India’s Iron Ore Mining

The Supreme Court has lifted the ban on iron ore mining in Goa, India’s largest iron ore exporting state, much to the relief of mining companies and all stakeholders. Mining and exports of iron ore contribute around 25% of the revenues to the state and therefore the state suffered maximum from the ban. The 19 month ban imposed in 2012 was a result of excess illegal mining in the state with negative impact on the environment, as a result the Supreme Court had to intervene. The court appointed a panel to look into the state of mining activity and based on the recommendation of the panel, the Supreme Court has capped the mining to 20 million tonnes. The panel comprising of justices, A.K.Patnaik, FMI Kalifulla and SS Nijjar, has ordered the cancellation of mining leases that were issued post 2007 in cases where the maximum renewal period of 20 years had been completed.

The ban was imposed at a time when the global economy was slowing down and the ‘Coalgate’ scandal came to the fore. Prior to the ban, around 85 mines were producing around 45 million tonnes per year. The ban in Goa and Karnataka further contributed to slowdown in the economy and all stakeholders involved with mining suffered. Over 100,000 jobs were lost with related assets like, trucks, dumpers, barges etc lying idle. Reports suggest that there are over 18,000 vehicles that have lost business. According to Atul Jadhav, president of the Goa Barge Owner’s Association, there are over 300 barges lying idle.

So is the lifting of the ban great news?

Depends. Firstly, the ban itself does not mean that the mining can commence immediately. The clearance from the Central Environment Ministry is required along with the state government lifting the ban and this could take some time. The ban in Karnataka was lifted in 2012 but mining is yet to pick up to earlier levels. In addition, the elections are in full swing and by the time the next government takes charge at the centre, the monsoon will start. Mining does not happen during the monsoon so the earliest mining that can take place will be post Sept.

China factor

The timing of India’s entry into the iron ore export market may not be in India’s favour. The days of super profits are gone. China is India’s largest buyer of low grade iron ore and their steel industry and iron ore traders blends this with high grade ore (62% iron content) from mines in Australia and Brazil. But China has been discouraging the large number of small scale blast furnaces that use low grade iron content ore (30% or below, iron content) in favour of furnaces that use high grade iron ore that are less polluting but have higher overheads. In fact, in order to lessen the dependency on imports, China has stepped up its domestic production of iron ore and reached 1.4 billion tonnes last year.

Australia the world’s largest miner and exporter of iron ore with a production of over 270 million tonnes per year, has been facing an excess supply of iron ore by around 35 million tonnes. This has caused the prices to fall given that the demand in China has also come down. The current prices in China for iron ore is lower by 16% and is quoting in the region of $113 (62% content) last week and would have dropped further had India continued to remain in the export market. Christian Lelong, the Sydney based commodity analyst with Goldman Sachs Group Inc., predicts that the prices will average around $108 this year and may further drop to around $ 80 in 2015. The mining cost of Indian iron ore is anywhere in the region of $50 to $60 per ton. So lower international prices is bad news for Indian exporters.

Both BHP Billiton and Rio Tinto, the two largest mining companies have invested heavily in developing newer mines and are placing their bets on lower operating costs to ride out this phase of low demand and excess supply.

The timing factor

At a time like this, India’s re-entry into the global supply chain will only add to further pressure on prevailing low prices and that’s not good news for Indian miners like Sesa Sterlite, which is also India’s largest private sector iron ore exporter. From peak exporting days in 2010, when India exported 117 million tonnes and was the third largest exporter globally, the levels have fallen to around 17 million tonnes in 2013.

For the indian economy, it’s critical that the mining operations resume as the same will have a cascading positive effect on all stakeholders. In the meanwhile, indian miners will have to ride the depressed market situation until the Chinese economy picks up again. Pundits, however, are skeptical if China will be returning any time soon to 9% growth days. It remains to be seen how India plans ahead.

 


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I'am a quintessential traveler surfing the winds of time. With horizons everywhere ... still searching for my path.....can I ? ....will I ?....if only time will wait... but the winds... they never wait !!!

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