Steel makers anxious as iron ore miners up prices over export demand
Merchant miners in Odisha have hiked prices of 62 Fe grade iron ore prices by more than nine per cent within two weeks as international prices climbed on sustained demand from China. With benchmark prices of high-grade fines touching $80 per tonne, more material is getting diverted to export markets, leaving the domestic steel makers in a tight spot.
Between August 10 and 23 this year, iron ore fines prices have been hiked from Rs 1,300 to Rs 1425 a tonne, an increase of 9.6 per cent. Prices of lumps in the same period have also been raised by 9.8 per cent from Rs 2,550 to Rs 2,880 a tonne.
"When international iron ore prices reach the level of $80 per tonne, exports become very lucrative for the miners. The same has happened for miners in Odisha as they are reaping good margins from exports.
For steel plants without captive ores, this is a tough time as they have to pay more for buying ore," said a senior official with a steel company sourcing ore from the market.
Iron ore price in China is trading at 47 per cent higher price than the low it struck two months back. Demand is especially buoyant for higher grade fines as a result of China's crackdown on its polluting industries, forcing its steel industries to opt for higher grade ore.
At its last e-auctions held on July 13, state-run Odisha Mining Corporation (OMC) had pegged prices of 62-64 Fe grade iron ore fines, sourced from its flagship Daitari mines, at Rs 1,600 per tonne.
"More than 75 per cent of the steel produced in India is from purchased iron ore with consequent dependence on merchant miners. In the entire domestic market, pricing and supply of iron ore are concentrated in the hands of a few merchant miners.
Due to an absence of indexing or pricing mechanism, the downtrend in the international market is either not followed or the trend is just the reverse in the domestic market. This results in high raw material cost and consequently high cost of steel production," said the unnamed official.
Steel companies without captive iron ore deposits are feeling the heat due to a wide differential in price at which they source the raw material. While the ex-mines cost of iron ore fines for a steel plant with a captive mine is around Rs 500 per tonne, the same for a plant with no captive resource works out at Rs 1,400 per tonne.
Such steel plants without captive mines are burdened with high input costs as opposed to the ones with captive ores as they enjoy comparatively lower input cost, assured quality and optimised despatch.
To help achieve a level playing field with their counterparts with captive resources, the steel plants have sought incentive either in the procurement of raw material or in the sale price of the finished product.
India's iron ore production surged by 22 per cent in the financial year (FY) 2016-17 to 194 million tonnes (mt) from 156 mt in FY16. Of the total production, steel industries consumed 126.67 mt and around 25 mt were exported. The rest 40 mt low-grade material got added to the mine heads..
There is a lot that can be taken away from this article, that I believe to be extremely pertinent to our current situation as an iron ore miner in India.
NSL are able to provide two aspects to the business transaction that are evidently missing from most business transactions between steel producers and merchants, "assured quality and optimised despatch." The company will maintain their client base and acquire more clients, just by providing these two elements of service that the steel producers without captive mines are unable to experience with existing suppliers.
Domestic iron ore prices differ substantially based on proximity to resources, ports and whether steel producers own captive mines. Here is a paragraph from an article I read the other day which is of great importance to the economics of iron ore purchasing within the domestic market.
"Last year NMDC has supplied 6.5 million tonnes of iron ore to Vizag Steel Plant from its Donimalai mines in Chattisgarh located some 500 km away. It sold iron ore at an average price of Rs 2,100 per tonne at the pit head. The steel plant incurs another Rs 1,200-Rs 1,300 on transportation."
That brings the cost of iron ore for Vizag Steel to AU$66-68, and that's from one of the biggest iron ore producers in India.
Given that NSL are approximately 184km from Minera as the crow flies, who are based in Bellary, transportation costs would be at least half of Vizag Steel (assuming that some costs are fixed regardless of distance), who truck their ore 500km.
It appears to me that NSL may be assisting in providing transportation, potentially enabling them to gain a share of the costs that would typically be experienced by the steel producer if they were to collect the ore themselves ex mine gate.
As announced on July 20th 2017 by NSL:
I found an article a while ago about a new web platform in use, which is headquartered in Kurnool for which NSL Mining Corporation as a client. The name is a bit different to the companies official name, but it is undoubtedly them, especially given the local proximity.
"The platform was formed with an intention to revolutionise the intercity trailer transportation. “We are a niche player in this category. When others were offering solutions by aggregating trucks on the platform, we thought of offering solutions in trailer segment. We take orders of the transportation of steel engineering materials, tankers and heavy machines,” says 37-year-old Illiyaz.
Among their services, Illiyaz notes that Truckers also offers transparent pricing, best pricing, customer support, periodical updates, vehicle tracking.
It is currently headquartered in Kurnool, Andhra Pradesh and soon plans to set up its own transport hubs in other parts of the country as well. “Being from Kurnool, I have local contacts here. Besides, the office is on Andhra-Telangana border, which is a good point for data collection. We have an office in Hyderabad and are planning to set up base in Chennai and Bengaluru as well,” says Illiyaz.
Illiyaz and Gouri, who started out the business with an investment of Rs 20 lakh, have adopted a commission-based model for the business. Truckers raises business for trailers from different clients and charges a particular commission from the former.
With the team of 10 people, the startup has served over 200 clients in three months’ time. It has a pan India network of over 1,500 trailers. Some of their corporate clients include Vijay Engineering, Rayalaseema Alkalies, Welspun Renewable Energy, Bharat Agro (Mahindra Tractors), NSL Mining Corporation, Uranium Corporation of India and others."
To summarise, if NSL are able to provide steel producers who do not own captive mines:
a reasonable price
transportation services thus reducing the cost to the client and increasing company profits
assured quality
timely dispatch, by controlling both production and transportation
Then the company will undoubtedly acquire and retain more steel producers who do not own captive mines.
Steel companies who do not own captive mines are currently at ransom to the industry, as they have no choice but to pay what they can for raw materials or risk having to halt production of their steel products.
There is plenty of money to be made, providing a quality and consistent 63%Fe product, delivered directly to the steel plant in a timely and consistent matter. This is what I believe the company are providing to Minera who is the first customer to appear extremely keen to build a repeat business model with NSL, scaling up to provide a fair portion of their monthly iron ore needs.
Once the thickening circuit is in place, the company should be producing above nameplate if they continue to mix in third party ore to achieve higher outputs at the same grade. This can potentially enable the company to fulfill the larger portion of Minera's demand, above the original nameplate capacity of 16ktpm (200ktpa).
Despite the share price sliding over the past 9 months, the company are now running 24/7 operations, approaching nameplate capacity and with the addition of the thickening circuit, will likely slide ride on past the original nameplate and produce much larger quantities, whilst saving water and reducing beneficiation costs overall.
Sample testing with Xinhai appears to still be ongoing, but as a highly successful EPC company, I expect that once the company are running at max capacity and the testing results are finalised, they will get straight to work on the next expansion, likely with a 200ktpa (potentially more given known improvements) which can easily be implemented with existing infrastructure, followed by much larger expansions with finance attached to ramp up into the millions of tonnes per annum.
(20min delay)