LONDON, March 1, 2018 /PRNewswire/ --
The suspension of several iron ore mines in India has led to a dramatic increase in Indian domestic ore prices – ore imports have lifted significantly and this has put a cap on domestic prices.
Indian steelmakers have lost competitiveness in the high ore price environment and, as seaborne ore prices are expected fall below the parity pricing threshold later this year, this loss of competitiveness will be locked in. Increasingly, access to captive ore will be a key determinant of cost competitiveness in India.
The sudden supply gap
Odisha accounts for more than half of Indian domestic iron ore production and, consequently, it is a key supply region for Indian steel mills. Thus, when the recent Supreme Court ruling suspended 7 state mines from 01 January this year, the effect on ore prices was tangible. These mines, which produce ~20 Mt annually, had previously been fined more than $375 M for illegal mining carried out during the period 2000-2010, however, having defaulted on these payments, their mining activities were mothballed until further notice. Banking on a supply tightness, Indian miners immediately lifted ore prices by over 20% from the end-December level and the current, ex-mine, 63% Fe fines price is at ~INR2,700 /t (i.e. $42 /t).
The sweet spot for imports
Under normal supply/demand conditions, Indian domestic iron ore prices are determined by import parity pricing when seaborne prices are below ~$70 /t (n.b. 62% Fe, CFR China basis). However, when the seaborne price is above $70 /t, specific domestic supply/demand fundamentals are the key drivers of domestic price, irrespective of seaborne prices. Essentially, the parity price is that price at which the preference for domestic fines is completely eroded and steel mills find it economical to import ore, as illustrated below.
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