LONDON, July 23, 2019 /PRNewswire/ -- On 31 March 2020, the mining leases of mines totalling ~60 Mt/y of production will come up for auction. The majority of these mines are located in Odisha. The state government there has set out a 9-month schedule, from July 2019, for completing the auction process. However, we believe that this schedule is too ambitious and that mine restarts after the transfer of leases to the new owners will not occur for at least three to four months after the 31 March 2020 cut-off date. As a result, the current oversupply of ore in India will switch to undersupply and imports will be required. This Insight explores the mine auction process and sets out why we believe mine restarts will be delayed.
India is self-sufficient for iron ore
India is the world's fourth largest iron ore producing country after Australia, Brazil and China with an annual production of ~210 Mt. There are five major iron ore producing states in India. Amongst them, Odisha produces the most, contributing ~52% to total production. The state produces mostly medium-grade material (i.e. ~62.5% Fe) that is consumed domestically and some low-grade material that is either stockpiled or exported. The other iron ore producing states are Chhattisgarh, Karnataka, Jharkhand and Goa. In Goa, most of the iron ore produced (~20 Mt) is of low-grade and exported, but the Supreme Court has cancelled all mining leases here since 2018 for environmental reasons.
India is broadly self-sufficient in iron ore, as indicated in the second graph above, which shows that imports are minor compared with exports. However, this situation is likely to change, at least temporarily, owing to the iron ore mine auctions for the renewal of mining leases in 2020 in the key producing state of Odisha. Our view is that production in Odisha will certainly be impacted by these auctions and India will have to import more iron ore while the auction process is completed.
Indian market oversupplied in 2019
Since the mining leases of major iron ore miners in the country are set to expire on 31 March 2020, merchant miners in Odisha, which has the large majority of expiring leases, have ramped up iron ore production to maximise output in this fiscal year―the last fiscal year under current ownership. Despite the domestic market being oversupplied and the international iron ore market being undersupplied and trading at over $100 /t, Indian iron ore exports remain relatively low due to the 30% export duty that is imposed on ore of 58% Fe and above. In contrast, there is no duty imposed on exports of low-grade ore and pellets and these exports have shown some response in the current market.
Although currently oversupplied, following the auctions, we expect undersupply by 2020 Q2 when mine restarts under new owners will be delayed due to lengthy statutory approvals for forest/environment clearances, permissions from pollution control boards, mining plans etc. This undersupply is likely to last for at least three to four months.
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