Determined cleansing campaign by the government in the mining citadels of India is a precursor for revival in global prices. After the sanitization in Bellary and an equally scathing regulation of the mess in Goa focus has shifted to the mining hub of Odisha.
Justice M B Shah, Head of an independent inquiry commission recently visited mines in Odisha to carry out a preliminary assessment of the rot set in. Even before his visit grapevine had it that strict regulation of the mining activities is in the pipeline as the sole recourse to stem the systemic rot in the iron ore industry.
Commission in its damning report has recommended banning of exports of iron ore to annihilate corruption and malpractices besetting the mining companies. All encompassing malpractices has not only festered corruption but has also led to abuse of labour laws and ecology to the hilt.
Spike in demand and price of ore in the last decade has led to maddening quest for exorbitant profiteering.
The commission has pitched for a ban on export of iron as the panacea. It will not only ameliorate supply to the domestic mills but also bring in regulation in unbridled anarchy. Commission in its pristine recommendations has called for setting up of nodal enforcement agency to regulate the mining activities with allowance for export under its supervision.
It would be of avid interest to delve in the ramifications of already scuttled supply from India reaching a pinnacle with complete ban. India has been the 3rd largest supplier of iron ore fines after Brazil and Australia. It has traditionally played effective role in fixing the coordinates of the spot market.
With the annual pricing castigated in favour of quarterly pricing and subsequently to monthly and daily fluctuations gaining prominence with enhanced volatility iron ore market has been swiveling around the Indian flip flop and fluctuating sentiments in domestic steel market in China.
Q3 has been turbulent for the ore market with 31% drop in prices within October succumbing to global economic headwinds. However the down under market rebounded mildly till mid-November by 12% as the Chinese mills indulged in speculation to hedge against cost escalation.
Second half of November saw 3% correction with diminishing buying as year drew to close. A sudden blip of 2% in December instigated by reduction of lending rate by 50 basis points in China is ignorable flash in pan. Remarkably all through the vacillations in Chinese domestic steel market has commandeered undulations.
Indian export has been losing the centre stage after a nearly 25% drop in export volumes in the first 10 months in 2011 YoY after the unearthing of Karnataka scam closely followed by Goa. It is expected that the export will decline further culminating in drop of nearly 33% by March 2012.
Whereas total iron ore export last year was 97 Million tonne it is expected to be in the vicinity of 65-70 million tonnes by year end. Of course hike in export duty to 20% played second fiddle in the spoilsport.
The shortfall in Indian volumes has been supplemented by Pilbara mines in Australia and rather aggressive Vale. Price buoyancy in the first 3 quarters can partially be imputed to curtailed availability from India apart from resurgent Chinese buying to cope with production surfeit. With the thickening of economic crisis all other factors have become redundant. More so Australia and Brazil have not only effectively bridged the gap in supply but buyers have opted for blended lower grade iron ore as a cost pruning measure.
Market ridden with speculation will certainly take the ban stoically leading to flare in prices but the escalation won’t be sustainable with curtailed buying by Chinese mills during winter. In the long term as well massive capacity expansion in Australia and Brazil trying to circumvent logistical bottlenecks would do little to spruce up the prices. Experts opine that the Iron ore prices would oscillate in band of USD 130-150 per tonne in the entirety of 2012.
The intrusive tightening of noose has had its own pitfalls on the domestic steel industry which is beset not only with curtailed availability but the add on logistical bottlenecks holding the steel majors on razor edge. Hence the nobility of the regulation seem mired with practical pitfalls taking toll on the capacity utilization of steel manufacturers. At the same time the tendering process resorted to for fixing the prices is puckered with its own set of controversy with a common grouse of exorbitant prices for below par material.
Only time will enunciate the ramifications of changed supply dynamics in this turnover based market where a sudden jump in availability in domestic market might lead to development a haphazard market contour unable to fathom the sudden change . Domestic steel consumption dropping to mere 1.6% in real terms this year situation biting more than one can chew seems emerging.
At this juncture pre vacation flurry might be in the offing if the ban is enforced but ultimately market forces would level out the bumps post holidays.
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