In today's Finshots we look at the big dispute surrounding iron ore.
Where is the ore?
The premise is simple. Half of India’s steel producers are in a bind. They allege that they can no longer access iron ore (the key raw material used to make steel) and are requesting the government to halt the export of the key raw material immediately. But the iron ore producers are disputing this claim and offering their own take on the matter. So who’s lying and who’s not? Well, there’s only one way to find out. But before we get to the story, some context.
There are two kinds of steel producers. First, you have primary steel producers (Tata Steel and JSW Steel) who mine their own iron ore using what are called captive mines. Then, you have secondary producers who don’t have the resource to own mines. And while the primary producers can always access iron ore and produce steel without worrying too much about prices outside, secondary producers have to depend on others for their supply. When they don’t get it, they have to pay through the roof to access the key raw material. And as their input costs keep rising, output prices will also have to keep pace. This makes their products less competitive (price wise) and it all turns into a big mess.
So obviously they aren’t happy with the fact that iron ore prices have been rising and they want the government to do something about it.
But why exactly are iron prices rising you ask? Well, some of it has to do with China. As we wrote in one of our articles last year—
China is the world’s largest steelmaker. They are responsible for half of the global steel output and they need a lot of iron ore to keep meeting their lofty production targets. Also, considering the economy is slowly getting back up to speed, they have been beefing up the country’s iron ore stockpile for a while now.
Usually, they look at Australia or Brazil to fill the supply void. But natural calamities have disrupted that equation. A dam rupture in Brazil hit the country’s biggest mining company and the tropical cyclone Veronica affected production in Australia. Meaning, Chinese steelmakers have had to look elsewhere. And they eventually turned to India.
And so far, Indian iron ore producers have been exporting in record quantities to meet the Chinese demand. In fact, between January and June 2020, China imported more iron ore from India than they had done in the past 8 years. In August and September, 95% of India’s iron ore exports went to China. Overall, we are exporting so much iron ore that some people contest that there’s very little left for secondary steel producers. And the evidence?
Well, you can look at the prices. Iron ore prices have more than doubled from ₹1960 to ₹4160 per tonne in the period between June and December 2020. So obviously domestic supply is being rerouted elsewhere right?
Yeah, but here’s the thing. China isn’t the only factor at play here. In March 2020, the Odisha government auctioned 24 mining blocks after the license agreement with previous lease owners expired. The plan was to extend approvals almost immediately in a bid to seamlessly switch operations. However, considering Covid played spoilsport, that did not happen. In fact, only 12 mines are currently operational. So effectively, a lot of iron ore from Odisha never hit the market this year.
But that only means a ban on iron ore exports is of the higher priority now, right?
Well, maybe. But the iron ore producers contest that there is no shortage whatsoever. In fact, the Federation of Indian Mineral Industries (FIMI) issued a strong rebuttal in their recent letter to the PMO. As one article in the Financial Express notes —
“Duplicity of steel producers about shortage of iron ore is well exposed as some of the primary steel producers are themselves exporting iron ore. The very fact that steel companies are exporting iron ore means that there is no shortage of iron ore, otherwise they would have utilised it in their steel plants,” FIMI said.
So yeah, the steel manufacturers want a ban on exports and the iron ore producers want no such thing.
How do you resolve the deadlock? We don’t know. But if you have a hot take on the matter, we urge you to Tweet at us.