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India iron ore business needs a strategic change - Dr Firoz.


Date: 15-05-2009
Subject: India iron ore business needs a strategic change - Dr Firoz
The Financial Express reported that India's iron ore business faces a major challenge. It is a challenge for survival. While a significant part of the iron ore produced in the country are mined for captive consumption and another is tied up contractually with the domestic steel mills, the bulk of the business remains in the hands of the merchant players who have so far prospered through their global business. India exported more iron ore than it sold domestically for many years now and the bulk of the exports are carried out by the merchant iron ore miners in the private sector.

Dr AS Firoz an independent metals and natural resources analysts said that “Currently, it is clear; exports from India will drop sharply due to low demand from China and higher costs. The rise of the iron ore export business was driven by the ability to quickly raise production from the mines held by the private players which had more reserves than estimated previously when the world scrambled for it. They grabbed the opportunities, emanating almost exclusively from the massive hunger for iron ore fines from China.”

He said that “The Indian miners found a very good strategic balance in their product mix: they could sell the lumps in the local market at a hefty price and export the fines. They were blessed by the high ocean freight costs which left an attractive premium to be tapped on account of the freight differential derived over shipments from Brazil when they were to export to China.”

Dr Firoz added that “Currently, with the increased supplies from Australia, as the Chinese mills invested in Australian iron ore mines and the vastly reduced freight differential, the pricing power of the Indian iron ore exporters has dropped to nothing. Iron ore fines are getting exported at one third of the price that prevailed at the peak last year. Despite lack of economies of scale and backward technology in global comparison, the costs of mining iron ore remains comparable to the most efficient in the world, thanks to the low labor costs.”

He also said that “But to export, the iron ore, in most cases, especially in Orissa has to be moved a long distance and at a fairly high cost. Inadequate railway infrastructure and high railway freight have forced the miners to move ores by road and the costs in doing so have been massive. Internal transportation costs moved up at a time the miners were making huge money. Now the profits in the business are gone but the freight has remained sticky downward.”

Dr Firoz said that “However, if the iron ore export reference price drops to USD 40 per tonne to USD 45 per tonne, there will not be many who will find the business attractive. If iron ore prices come down by 50% today, Vale of Brazil will still walk home with a good profit. Even the Aussies will do well. But, at such prices, most Indian miners will lose money. Unfortunately, this is not something that will last a year or so. The best days for iron ore are gone and only the most efficient and the ones best placed logistically will survive. The iron ore business is set for a massive restructuring and need rethink.”

As per report, Indian iron ore industry is excessively fragmented and urgently needs consolidation. The new mineral policy needs quicker enactment. The government has to see that mines are not leased out in small bits and pieces for backyard mining. Let the resources not be wasted this way. Meanwhile, the iron ore industry needs greater degree of integration with the domestic steel industry. There are different models for successful execution of that. Like it or not, the Indian iron ore miners, especially those in the private sector will have to look for changes in their business models than remain satisfied with whatever they can extract from the export business.

Source : Financial Express

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