India May Influence Iron Ore Pricing Strategy

(business-standard) -- India, a major supplier of steel making raw material iron ore to China, will have a major bearing on the Beijing strategy to loosen what is perceived to be the monopolistic pricing power of the Brazilian Vale and Anglo Australian BHP Billiton and Rio Tinto. But, our last budget raising the export duty on iron ore fines to 20 per cent and bringing it on par with lumps and intermittent shipment dislocations from Karnataka could not be to Chinese liking.

This is because China is trying to frame a 5-10 year strategy of reducing its uncomfortably large ore dependence on the big three mining groups. In fact, their tight grip over the Chinese market has allowed them to usurp price setting power. Recent Indian moves discouraging exports, suspected at the prompting of local steel mills runs counter to the now evolving Chinese strategy of having a more diversified supply source than now. As revealed so far, the strategy will be resting on two strands. First, attempts will be made to rapidly step up imports from Chinese-owned offshore mines, particularly in Africa. Second, China will develop and strengthen imports sources beyond Australia and Brazil. That Vale, BHP and Rio have over 60 per cent share of Chinese ore imports is in itself a measure of Beijing’s uneasiness with the current state of affairs.

China will be counting less and less on Indian supplies of ore fines, which at one point were around 100 million tonnes a year, in its moves to break the grip of the world’s three major miners. From C S Verma of SAIL to H M Nerurkar of Tata Steel, everyone in the Indian steel industry is preaching the mantra of conservation of ore. Speed breakers to be encountered in land acquisition, mines linkages and environment and forest clearances have made fixing of target dates for steel capacity building here a futile exercise. Even then, for India in the context of its GDP growth rate and emphasis on infrastructure building, steel capacity of up to 350 million tonnes should be the goal. Translate that into iron ore requirements at the rate of 1.6 a unit for one unit of crude steel and you have an idea how much of the mineral we will need in the coming years.

China should also be taking into account the ambition of iron ore, endowed Indonesia and Vietnam to emerge as steel producers of some size. As Posco, still not able to give shape to the Orissa project announced six years ago, has started construction of a three-million-tonne mill in Indonesia, SAIL’s Verma remains steadfast in his commitment to build a mill of identical size in the archipelago. At the same time, Tata Steel’s 4.5-million-tonne project in Vietnam, under a cloud for some time, is finally getting traction. As all such things happen, China’s search for supply alternatives to Vale, BHP and Rio will automatically shrink.

Even then, China will bring into play economic diplomacy to seek full or part-ownership of mines or equity investment linked to assured offtake of mine production in south-east Asian countries. While the country will ever remain on the lookout for iron ore resource acquisition opportunities across geographies, the focus will remain on West Africa. The Chinese Hanlong mining group chairman says, “Australia and Brazil both have great resources. But they don’t provide many opportunities for Chinese investors due to rising cost pressures and policy barriers. More, most of the resources and attached infrastructure are controlled by the largest mining companies.” Chinalco is still licking its wounds from Rio spurning its $19.5-billion investment offer in 2009 in favour of a mining deal with BHP, which subsequently came unstuck.

Whatever obstacles there may be, China has set for itself an ambitious target of stepping up ore imports from its invested offshore mines during the 12th plan period (2011-15). An official of China Iron & Steel Association said his country “currently owns less than 10 per cent of imported ore. We should be seeking 50 per cent of ore from Chinese invested overseas resources in the next 5-10 years.” Overseas resources that China has acquired so far should on development be a source of 150 million tonnes of ore a year. But much of these resources are not ready for exploitation. Last year, China received 60 million tonnes of ore from its owned mines abroad.

MEPS (International) consultancy has forecast an 8.5 per cent rise in Chinese ore demand to 1.07 billion tonnes this year, when crude steel production will climb to 728 million tonnes. In the first half of 2011, the country’s ore imports rose eight per cent to 334 million tonnes, with buying cost rising a hefty 54 per cent to $53.78 billion. China’s ore self-reliance pursuit has not, however, dissuaded mineral majors from opening new mines. New investments find justification in forecasts that prices of ore with iron content of 62 per cent will stay above $150 a tonne till at least 2015. Such prices are obviously assumed on the basis that Chinese import demand is not to be dimmed too soon.