Production cut by Vale SA to benefit Indian iron ore and steel producers in short term: Ind-Ra Ratings

The recent revocation of the mining licence of Vale SA for the Brucutu mine in Brazil will be favourable for domestic iron ore miners and steel producers in the short term, believes India Ratings and Research (Ind-Ra). With a limited supply of iron ore, the hardening prices of iron ore and steel in the international market and better export prospects are likely improve the average realisation and capacity utilisation of domestic companies.

According to Vale’s announcement, the revocation of the mining licence following the collapse of a dam in Brumadinho, Brazil, would lead to an annual production cut of 30 million tonnes. The cut is in addition to a 40 million tonne cut earlier announced by the company. The overall 70 million tonne cut represents approximately 5.0% of the total global imports and 2.0% of the global production.

The rise in iron ore price could put pressure on the margins of domestic players such as JSW Steel Limited, Jindal Steel & Power Limited, Rashtriya Ispat Nigam Limited that do not have captive iron ore mines for their 100% requirement compared with companies such as Steel Authority of India Limited and Tata Steel Limited that have 100% captive iron ore mines.

However, Ind-Ra does not expect the pressure on the margins to impact any outstanding ratings of steel or iron ore producers rated by Ind-Ra. The production cut could be compensated, to some extent, by an increase in the production from the other mines of Vale or other miners.

Following the enforcement of the force majeure clause by Vale, Brazil’s import prices for China, which is one of the world’s biggest iron ore importer, has sharply risen by 20.0% to $108/tonne in the past two weeks. Ind-Ra expects the prices to remain elevated at $ 85/tonne until 1HFYE20.

After the recent correction in domestic iron ore prices, Ind-Ra expects the prices to firm up because of two reasons. First, given iron ore imports will now be expensive, iron ore importers in India may source it from domestic miners, leading to a demand-supply mismatch. Second, pellet exports could witness an increase as importing countries such as China, Japan and South Korea that depend on Brazil could now source pellets from India in view of the production cut by Vale. Hence, the global demand-supply situation looks favourable for domestic iron ore merchants and pellets manufacturers.

In Ind-Ra’s opinion, the increase in the iron ore import price for China would translate to a $ 25-30/tonne rise in steel price, thereby rendering Chinese steel imports expensive. The production of domestic steel producers with full or partial captive iron ore mines is less likely to be impacted. Small steel producers could source iron ore domestically or import, though both situations would lead to an increase in input costs for them.

Nonetheless, domestic steel price could increase by $ 20-25/tonne in view of the global price rise scenario and the likely increase in domestic iron ore and pellet prices. Ind-Ra believes that without a commensurate increase in the price of input (iron ore), the average realisation for domestic steel producers such as Tata Steel and Steel Authority of India could improve and could, thus, lead to higher profitability as they have 100% iron ore backup through captive mines.

The production cut by Vale could further provide impetus to the exports of iron ore fines/pellets. India is a net exporter of iron ore fines/pellets. Given the limited supply available from Brazil, there would be a likely increase of 15.0%-20.0% in exports by Indian companies to major iron ore importing countries.

India’s steel imports have been on the rise since the start of FY19 due to globally softening steel prices. India imports the majority of its steel requirements from China, Japan and South Korea. With prices firming up in these countries, imports could be contained in the short term, rendering domestic steel producers more competitive. However, with regard to companies importing high-quality steel, which has limited or no availability in India, higher prices could lead to some margin pressure in the short term.

Shekhar Ghosh is consulting editor, He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at

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