Mumbai | September 6, 2016:

In a major relief to the Indian steel industry, iron ore prices have started falling in Chinese markets after the Group of 20 (G20) countries decided to cut steel production to reduce global supply glut.

The benchmark iron ore price in Guangdong, China currently trades at $59.39 a tonne. In contrast, Indian public sector miner NMDC has cut iron ore prices by six per cent to sell lumps at Rs 1,700 a tonne and fines at Rs 1,460 a tonne. For September, however, government-owned NMDC rolled over the price for the third month in a row.

Iron ore price in the world market, however, remained extremely volatile. The prices of steel-making raw material have declined from the level of $70.46 a tonne early this financial year. In June, however, iron ore prices hit the lowest for this year to $48.40 a tonne following weak demand outlook from the steel industry.

Immediately after the G20 countries discussed to curb steel supply glut largely dominated by China, BHP Billiton, the world’s largest mining company, has forecast iron ore price to fall below last year’s low of $38.30 a tonne on new supply coming in from Australia and Brazil. The fall in global iron ore price is set to create pressure on the government-owned iron ore miner NMDC which, according to trade sources, kept its raw material price unchanged for September, the third month in a row.

“Pricing pressure is expected to be harsh on government-owned merchant miner NMDC more than the world market due to increase in supply from Odisha after opening up new mines in the coastal state. Expectations are that JSW and some captive users might get some iron ore linkages in the mining auction scheduled this month, which would reduce JSW’s dependence on iron ore procurement from NMDC,” said Goutam Chakraborty, research analyst, Emkay Global Financial Services.

Global leaders in G20 meeting in Hangzhou G20 summit reached an agreement acknowledging that overcapacity in the steel industry is a global issue.

The world steel market is facing oversupply due to weak demand following lower infrastructure spend. Capacity utilisation level fell on a monthly basis, indicating possible impact of controlled output and curtailment of capacities. On an annual basis, major producing countries witnessed higher output for July. India remains on top of the chart as far as the production growth is concerned. With strong output growth and weak demand, prices remain under pressure.

World capacity utilisation was reported at 68.3 per cent for July 2016, flat from the previous month.

“Downside risk is higher for Indian iron ore miners on increase in supply and weak demand from steel mills,” said an analyst with a broking firm.

An Emkay Global report on steel says domestic steel consumption continues to be weak due to poor demand and seasonality as well. Recent uncertainty on continuation of minimum import price and imposition of anti-dumping duty also might have impacted the same.

Good monsoon keeps some hope alive on demand recovery in the third and fourth quarters of FY17. Supply growth, however, will continue to remain strong due to the recently added capacities by bigger players. Without stronger demand, prices might remain under pressure.

In the near term, the World Steel Association expects global finished steel consumption in 2016 is likely to reach 1.49 billion tonnes, a fall of 0.8 per cent from 2015, on top of last year’s three per cent drop from 2014.

The key reason for the bearish forecast is the four per cent contraction in Chinese consumption.

According to a DBS report, global production volume would remain stagnant during 2016-17, with the oversupplied volume being 15 million tonnes. Following the addition of new capacity, the global utilisation ratio is expected to decline up to 66 per cent in 2017. The exacerbation of global steel imbalances and declining utilisation continue to pose risks to the industry for the foreseeable future, unless more concerted efforts are made by the industry and governments to address the challenges, the report noted.

(Source: http://www.business-standard.com/)