Last updated: February 19, 2013 8:57 pm

Indian iron ore sector faces torrid time

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“I must not serve my distant neighbour at the expense of the nearest.” This expression used often by Mahatma Gandhi, the Indian nationalist leader, aptly describes the situation facing India’s vast iron ore industry.

A series of production bans and export tariff hikes – designed to help local steelmakers – have pushed India’s iron ore exports to the point of collapse. What was until recently the third- largest exporter of the commodity used in steelmaking, after Australia and Brazil, risks having to import large amounts of ore for the first time in decades.

The iron ore crisis matters well beyond India. As the main raw material in steel, iron ore is crucial to the global economy and critical to the profitability of two of the world’s largest heavy industries: mining and steelmaking.

The disappearance of Indian supply has seen world prices soar to $155 a tonne, an increase of more than three quarters since last September. The rise has swelled profits of Australian and Brazilian iron ore miners such as Vale, Rio Tinto, BHP Billiton and Fortescue.

“Today maybe it’s $40 higher than it would have been [with Indian supply]”, says Jim Lennon, chairman of commodities research at Macquarie in London, who thinks higher prices will continue this year.

“It’s a significant impact, no doubt about it . . . while India loses $10bn plus earnings on its balance of trade by not exporting, other iron ore producers are receiving massive windfalls,” he says.

The impact is just the opposite in the steel industry: Indian domestic producers are enjoying plentiful supplies and somewhat lower prices. But international companies such as Baosteel of China, Nippon Steel in Japan and ThyssenKrupp of Germany face higher raw material prices.

Having peaked at 119m tonnes in 2009, Indian exports began to slide as allegations of widespread illegal mining translated into a shutdown in the large mining state of Karnataka and the introduction of restrictions in other resource-rich parts of central and eastern India.

At the end of last year the flow virtually stopped altogether, with India shipping just 1.4m tonnes in the three months to December – usually a period of peak sales to China – following a second total ban in the coastal state of Goa.

The restrictions have led to fierce complaints from shuttered miners, while Sesa Goa, the iron ore arm of billionaire Anil Agarwal’s London-listed Vedanta Resources, says it is now seeking to open up new deposits in Africa.

Earlier this month PK Mukherjee, the group’s managing director, confirmed plans to invest as much as $2.6bn in a project in Liberia, as part of an attempt to revive his lossmaking mining division.

“This is a crisis period for all mining companies in Goa, including Sesa Goa, and given we are the largest the pain is very large,” he told the Financial Times. “We need to ensure our sustainable future growth, so we need to look both in India and abroad . . . In Liberia our experience so far is fantastic.”

Sesa Goa is far from the only Indian group looking overseas. “A lot of the Karnataka guys packed their bags and their shovels and are now in Malaysia or Morocco,” says one European ore trader, speaking on condition of anonymity.

India’s iron ore crunch also offers a cautionary tale of the perils of resource nationalism, as other countries such as Indonesia consider following India’s export restrictions, the latest of which came when it raised duties to 30 per cent at the start of last year.

Indian exports have since fallen sharply, but domestic production has fallen too, meaning steelmakers without access to iron ore mines are also being forced to look abroad. Chances of supply restarting now rest with India’s notoriously slow-moving court system, which permitted limited mining in Karnataka to begin at the end of last year and will also review the continued ban in Goa soon.

But other threats remain, even if activity slowly picks up in these areas, including demands for windfall profits taxes from other mining states and the more basic problem of corruption.

“Why was India’s iron ore production so high for so long? It was because much of it was blatantly illegal,” says Sasha Riser-Kositsky, an analyst at the Eurasia Group, a risk consultancy.

“It is actually really hard to be a large-scale miner in India and have all of your papers in order . . . the whole experience speaks to the fundamental difficulty of doing business there.”

Few analysts expect a recovery this year, but some are at least optimistic of an eventual upturn. “Our view is that India will work through these current challenges and find a solution,” says a senior executive at one trading house.

But others fear India’s iron ore slump may now become permanent. “From what we understand things are not really going to change any time soon,” says another figure from a large ore trader.

Exports will remain close to zero for at least the next three to four years and potentially for the whole of the coming decade, the trader says.

Either way, in the near term at least, India’s iron ore industry faces a torrid future.

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