India’s steel mills may face iron ore supply crisis

Published date: 22 May 2019

Indian steel firms are facing a potential shortfall of around 60mn t of iron ore in the April 2020-March 2021 fiscal year as mining leases for several merchant mining companies will expire by 31 March 2020 and new auctions to reallocate these mine blocks have yet to start, said India Ratings, a unit of global ratings agency Fitch, in an analyst report.

The deficit could lead to higher imports of iron ore, although the volumes imported will depend on international prices next year.

India's total iron ore production in the fiscal year ended 31 March 2019 was 210mn t. It is expected to be around 225mn t in the current 2019-20 fiscal year as mines are eager to dig up as much ore as they can before their leases expire. India's total imports increased by 89pc to 8.7mn t in 2017-18, from 4.6mn t in 2016-17.

Mining leases of 59 iron ore mines with a total capacity of 85mn t/yr in the major producing states of Odisha and Karnataka are expected to expire on 31 March 2020. India Ratings has estimated the combined production of these mines at around 60mn t/yr.

Any shortfall in domestic ore supply will mostly affect integrated producers, which partly or fully rely on third-party suppliers, including JSW Steel, Vizag Steel, Essar Steel and Jindal Steel. Tata Steel and Sail have their own captive iron ore mines to fully meet steel production requirements.

A higher output this fiscal year could allow mills and mines to stock up on iron ore in advance, while state-run iron ore producer NMDC, which will be unaffected by these lease expiries, could step up production. But it will still leave a fairly substantial demand-supply imbalance, unless the issue can be quickly resolved and the expiring leases find new takers.

NMDC will be the only major merchant mining company left standing next year. The government has to find a way out of this problem because imported iron ore prices are much higher than domestic prices and mills will be badly affected if lot of iron ore needs to be imported, Amitava Mukherjee, NMDC's director of finance, told Argus in an interview earlier this month.

NMDC can add a total of 11mn-12mn t/yr of capacity by the next fiscal year if it manages to get a favourable court order to restart its 7mn t/yr Donimalai mine in the southern state of Karnataka, which has been shut down because of a royalty dispute. India Ratings expects the company will add another 4mn-5mn t/yr of output if it gets more transportation to evacuate ores from its mines.

Mining auctions typically take three to six months to conclude and if these do not start before the second half of this calendar year, it is unlikely to conclude in time for the new leaseholders to promptly start operations in 2020-21. A bigger problem is the number of regulatory approvals required to start a mine, which could take years to complete.

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