Date | Jul 14, 2016:
In a chat with ET Now, Rana Som, Former CMD, NMDC, says that Iron ore production increased on impetus from Chinese markets. Edited excerpts:
ET Now: Iron ore demand is making a comeback though China data has been mostly mixed. What is your take?
Rana Som: In the last 15-20 days, the iron ore prices in the Chinese market has jumped to about US $56-57. Though this is a very temporary phenomenon because there has not been any fundamental change in the market. The supply side is in excess of the demand. Whatever spike in the iron ore prices we have witnessed during the last five-six years, it has happened only because the Chinese demand has gone up. The price of iron ore increased because of the Chinese demand. When the Chinese demand has stabilised the supply remained unchecked. So, the iron ore prices declined to about $37. I will not be surprised if the prices shoots up and stabilise somewhere at about $45-50.
ET Now: The iron ore price have rallied to $70 mark and then declined to $55 levels but still it has been a good revival in the sector. What according to you is causing this kind of a rally?
Rana Som: Price of iron ore depends on two factors - one is the supply-demand scenario. Due to the interplay of supply and demand the prices went down in the global market. Whatever is happening is a temporary phenomenon. In China, some of the steel plants have shut down. The steel prices have gone up and because the steel prices have gone up in the domestic market, there has been a reflection in the iron ore prices in the Chinese domestic market.
Therefore they were ready to pay little more price for iron ore imported from Australia and other places. But if you analyse the Chinese ports, they are already carrying a huge stock of iron ore today and the prices can go down any moment and it is not going to last. Even if iron ore prices touches $60 or more today, I do not think there is any cause of jubilance for the iron ore miners.
ET Now: What is the right way to look at current iron ore price scenario?
Rana Som: I did an analysis and found that iron ore prices had been almost stable at around $50 globally in dollar terms. As for steel production, global producers — except for China, India and to some extent South Korea — have been stagnant over the last 35 years. But the China impetus has spiked iron ore prices substantially.
Now iron ore is a commodity where the capital cost is more important than the operational cost. Any price will be okay if your operational cost is low. But then the capital cost per tonne of iron ore production is about $120, which means once you make an investment in building a mine you have no option but to produce.
That is exactly what has happened with BHP Billiton and Rio Tinto. They are going to achieve a production figure of $360 million. I believe at that level they are going to stabilise their production. Similarly, BHP Billiton is going to stabilise somewhere at around less than $300 million.
But on the other side, all the magnetite iron ore mines in Africa have shelved their interest spends. They no longer carry forward their investments. They are not coming out with fresh investments. Whatever investments are already there, they have to keep producing with that. In the process, they have to produce more than the global market can absorb.
ET Now: Is the inference that some of the long term players have the capacity in store to capitalise?
Rana Som: I think so far as the demand part is concerned, I do not see any immediate prospect of iron ore demand shooting up. And whatever iron ore mines have been commissioned and is going to be commissioned in near future (excluding Roy Hills in Australia) they are going to achieve the production figure of 55 million tonnes.
Indian iron ore production is certainly going to go up about 180 million tonnes in the current financial year. Therefore, we will see that iron ore supply is not only stable, it is also increasing. There is not much promise on the demand side and therefore the oversupply in the iron ore market in my assessment will continue for quite some time. The situation in the Indian domestic market could be a little different because of the export duty. India hardly exports iron ore, except from Goa, and if the export duty continues Indian market will be isolated from the global market and this isolation can lead to price rise in Indian domestic market which will be unrelated with the global price trend.
(Source: http://economictimes.indiatimes.com/)
ALSO READ: Govt to form expert group to analyse iron ore sale by NMDC (Source: http://wap.business-standard.com/)