Slowing demand to keep iron ore prices under pressure

Slowing demand to keep iron ore prices under pressure

Before investing in iron ore you should look at factors such as the government's mining policies, likely export/import figures and demand in key consuming countries such as China.

Australia, the world's biggest iron ore exporter, has raised its price estimate for the year. It says higher steel consumption in China will boost demand and, hence, prices. According to Australia's Bureau of Resources and Energy Economics, or BREE, iron ore prices will average $119 per metric tonne in 2013 compared with the December estimate of $106. BREE is a unit of the Australian government's Department of Resources, Energy and Tourism.

But the Indian story may turn out differently. Experts say government policies may keep prices under pressure in the short term, though for the long run, BREE, too, is bearish. It says iron ore prices will fall to $90 a tonne over the next five years as demand for the steelmaking ingredient falls and new supply hits the market. Iron ore was trading at $130 per tonne on March 19.

Giriraj Daga, senior research analyst, Nirmal Bang Equities, says, "Domestic iron ore prices have become aligned with steel prices. International iron ore prices do not have much bearing on domestic iron ore prices."

March futures on the Indian Commodity Exchange fell 9% (to Rs 7,608 per dry metric tonne or dmt) between February 18 and March 28 (Rs 8,425 per dmt).


We believe domestic iron ore prices will remain weak and may decline by 5-7% by the end of 2013. Also, small players will continue to remain shut.


Associate Vice President, Research, India Infoline

April futures are under pressure too; they fell 0.34% to Rs 7,379 per dmt on March 30 from Rs 7,404 per dmt on March 5. A dry metric tonne is a globally acceptable unit for measuring iron ore. It has the same mass value as a metric tonne, but without any moisture content.

Sandeep Joon, senior research analyst, SMC Comtrade, says, "Prices of iron ore have been falling of late due to glut that is not being absorbed by China and other countries. But there are expectations that accelerating economic growth in China, the biggest buyer, will boost demand."

The BREE says India's iron ore exports may fall between 2012-13 and 2017-18. The reason is mining ban in some big producing states which is expected to remain in place for some time as measures are taken to check illegal mining of iron and manganese ores.

It is expected to result in a sharp fall in domestic iron ore production, which, in turn, will reduce exports. One more factor that will hit exports is continuation of the 30% excise duty on iron ore exports. The aim of the duty was to discourage exports so that Indian steel makers can get access to iron ore.

Due to the above mentioned factors, exports are likely to total nine million tonnes in 2013, compared to 26 million tonnes in 2012. Net imports are expected to peak at 18 million tonnes in 2016 before domestic supply begins to rise.


Factors That Affect Prices
> Grades of iron ore
> Export demand
> Steel industry growth
> Sea freight rates
> Govt regulations (export import and mining)
> Big players' pricing mechanism

Before investing in iron ore you should look at factors such as the government's mining policies, likely export/import figures and demand in key consuming countries such as China.

Tarang Bhanushali, associate vice president, research, India Infoline, says, "China will continue to play a big role in the market. Its rate of change of steel production will provide direction to iron ore prices globally. In India, closure of mines in Karnataka and Goa has led to a sharp fall in production. Regulatory steps by states as well as the central government will also provide direction to domestic prices."

China, the top consumer, plays the biggest role in giving direction to metal prices. SMC Global's Joon says China's iron ore output can rise by 20 million tonnes in 2013, and in the global market, expansion by Vale, Rio Tinto and BHP Billiton can increase their output by 100 million tonnes in 2013.

China imported 56.42 million tonnes iron ore in February, 13.17% less on a year-on-year basis and 9.12 million tonnes less than the January figure.

Market experts say though China's demand for steel is easing after the fade-out of the stimulus put in place after the 2008 financial crisis, the ongoing growth recovery may expand its iron ore imports by 5% a year till 2018.

"We expect demand from China to be steady in 2013 but lower than that in the last five years on account of flat growth in steel production. Imports will be flat on a year-on-year basis. Global supply is expected to increase in the second half of 2013 as many new mines are expected to start producing by then," says Bhanushali of India Infoline.

The price outlook is bearish as NMDC has cut prices of lumps by 6% for January 2013 and 2% for March 2013. Giriraj Daga of Nirmal Bang Equities says, "We remain negative on iron ore due to subdued demand, mostly from the steel sector, and massive capacity addition."

Bhanushali of IIFL seconds Giriraj. "We believe domestic iron ore prices will remain under pressure and may decline by 5-7% by the end of 2013 on the back of our expectation of marginal resumption of mining in Karnataka. We believe steel production growth will remain subdued in 2013 and small players will continue to remain shut," he says.