China’s preference for long-term contracts affecting Indian iron-ore miners

1-Oct-2018

Indian overseas shipment of high-grade iron-ore fines and lumps is facing significant risks as Chinese steel mills are increasingly looking at long term supply agreements.

According to three miner-exporters based in the eastern Indian province of Odisha, the largest iron-ore producer in the country, Chinese steel mills are increasingly seeking long-term supply agreements with global resource majors instead of relying on merchant purchase by traders.

The miners said that with Chinese steel mills moving aggressively to clinch long-term supply agreements with resource majors like Rio and Vale, medium-sized and small merchants miners in Odisha would be hamstrung in competing to match such agreements.

It was pointed out that the fragmented nature of the Indian iron-ore mining industry and the predominance of small and medium-sized mines did not permit the latter to enter into any long-term supply agreements.

These small and medium-scale mines could not ensure guaranteed supplies of fixed volumes of raw materials of consistent quality (iron content of 62% and above) over longer agreement periods.

Nor were these small and medium-sized mines in a position to lock prices over the long term in volatile market conditions, the three miner-exporters averred.

According to these miners, the single biggest impediment to getting into long-term supply agreements was the 30% export tax payable on high-grade iron-ore lumps and fines shipments.

In falling price market conditions where the export tax made net export realisations marginal or negative, the miners had the option of pulling out of the market which would not be an option under long-term agreements if they were to be signed in bearish market conditions, the miners said.

The falling trend on overseas shipments had already started to emerge with iron-ore freight traffic at all the major ports slumping 11% during April to August 2018 at 16.628-million tons, compared with 18.732-million tons shipped during the corresponding months of the previous financial year, the miners said, citing data sourced from Indian Ports Association.

If the trend among India’s largest iron-ore buyers, Chinese steel mills, were to gain momentum it would have a bearish impact on Indian exports particularly at a time when domestic production was on a rising curve.

In the current financial year, domestic iron-ore production is forecast to grow 5% over the 200-million-ton mark achieved during 2017/18.

With over 81% of Indian shipments heading to China, any changes in buying preference among Chinese steel mills would impact foreign currency realisations of most small and medium-sized mines, miners said.

Source: MINING WEEKLY