The auctioning of coal mines has ensured to some extent the security of sourcing of this critical input for power, steel and cement industries from the indigenous mines. The estimated import of coal in FY15 is around 200 million tonne. After the process of auctioning of a large number of 204 mines is over in another four months’ time, the coal import for FY16 is likely to come down.

For coking coal, however, the import dependence would have to continue for considerations of quality of the limited domestic supply, productivity and energy consumption of the steel plants. The global prices of coking coal (currently at $109.50/t for Q1FY16 supply for SAIL/RINL from Australia) are 5% lower than Q4 FY15 prices.

As SAIL plans to enhance production (including additional supply from ISP/Rourkela) in FY16 and RINL consolidates higher availability from the new (structural/wire rods) mills in the next year, the import volume for coking coal would be larger (including Tata/JSW). The same may not be true for non-coking coal provided the allotted mines commence physical operation expeditiously by the next few months.

Iron ore prices, similarly, have nosedived in the global market, falling from $94/t in May ’14 to the current level at $55/t CFR China. As India is not importing large volume of iron ore, the price decline has not significantly influenced the production cost, although NMDC has been correcting the domestic price in tune with global price movement for the last few months. There are various projections available for the prices of iron ore for the next year.

As global steel production is showing negligible growth over 2014 and China, most importantly, is slowing down steel production following internal economic restructuring, the short term projection for iron ore prices is further down. As per World Steel Dynamics report, the global prices may come down to $45/t CFR China by September ’15.

Interestingly even at this low price, the viability and growth of the large players, Rio Tinto, BHP Billiton and Vale are not endangered as their average cost, including the cost of transportation from the plant to the port of export, stands at $21/t.

The cost of production has come down due to drop in fuel cost and strengthening of dollar. With freight costs also coming down sharply, the cost of Australian iron ore comes to $25/t-$30/t (including tax, port charges etc) CFR China for 62% Fe content. This implies that the current prices of iron ore are still workable for the big players and they can still continue operations with another $10/t drop in prices.

But the major cause of worry for them is the traded volume which may further come down with stagnant growth in steel production, specifically by China. A definite shift from investment to consumption, increasing concern for pollution control and tightening of bank credit has made China to cut back steel production and consequently reduce their iron ore import. China has a capacity of more than 600 million tonne of iron ore concentrates and pellets, but the average cost of production of around 70% of its producers is more than $80/t which means that at the current global prices, the imports are much cheaper and to continue steel production even at a lower level than the previous year, China’s dependence on imports of iron ore would make the big players happy.

China produced around 400 million tonne of concentrates (conversion ratio nearly 3 times higher than 62% Fe contained) in 2014 with average price of $125/t. The domestic production in FY16 would sharply drop in the present context. The global price of iron ore may not come down further with Chinese demand still playing a major role in the traded volume of this product.

Source:hellenicshippingnews.com