Indian iron-ore prices will remain elevated over the mid-term due to supply-side constraints and a revival in demand post the covid-19-induced lockdown, according to a report by India Ratings and Research Limited.
Domestic iron-ore prices rose by 28% month-on-month in December and 95% year-on-year to Rs 4,600/ton amid lower supplies due to delays in plans to ramp up mine supplies from the eastern state of Odisha.
Although the state and central government have been trying to alleviate the supply situation, the measures are likely to be insufficient, the report added.
Global supplies of the most important steel-making material has also been constrained due to disruptions in South Africa and Brazil. That comes amid a 6% growth in world’s leading steel producer China, notwithstanding the disruption caused by the pandemic.
The output of steel in India, the world’s second-largest producer, has also picked up since the late March lockdown with capacity utilisation improving for some of the biggest players.
Indian steel companies with captive mines are still comfortable despite the supply shortage prevailing in the broader market, as they stand to gain due to lower logistic costs as well as better economies of scale.
The Indian government had auctioned off a number of iron-ore mines last year in March when their leases came up for renewal, but most paid hefty premiums to secure the lease.
If and when the auctioned Odisha mines ramp up, there is unlikely to be a level playing field. This is because the miners who secured leases under auctions paid hefty premiums, while those who have valid leases have not had to pay any premium, says India Ratings.
The differential cost structure will result in varied profitability in the steel industry, especially those who have to be dependent on merchant miners, it added.
Indian steel prices have increased by over 55% since the start of the year and producers are now gearing up for another hike in line with surging demand for the metal.