Mining Industry suffers the dark phase
The mining industry has been the worst affected due to the pandemic that has left the world in grief. Fitch analysts keep their iron ore price forecast for 2020 at $85/ton, as prices stay resilient despite the covid-19 backdrop. Iron ore production growth will decline to 0.8% y-o-y in 2020 compared with 4.7% y-o-y in 2019, because of government lockdowns around the world causing operational disruptions, a report said. Supply has been disrupted so far by forced mine shuts in Canada, South Africa, Peru, and India. Seasonal weather also affected Brazil and Australia.
China Chamber of Commerce of Metals, Minerals and Chemical Importers and Exporters (CCCMC) said- Ore import from India has already declined by 22.9 percent, lowering India’s rank to third in terms of trading of iron ore. Some of the leading exporters say, India’s iron exports might decline by 40 percent in 2020.
The country supplied 23 percent of China’s 326 million tons of iron ore imports last year, making it the second-biggest supplier after Australia.
NMDC (National Mineral Development Corporation) limited has reduced the prices of iron ore both Lumps and Fines by Rs 400 per ton and DRCLO (DR Calibrated Lump Ore) by Rs 470 per ton. After the reduction, Lumps and Fines are now priced at Rs 2,250 and Rs 1,960 per ton respectively while DRCLO at Rs 2,610, a senior official of NMDC said adding the reduction was effective from May 9. This reduction in the prices of iron ore has given a lot of relief to the steel companies, especially sponge iron-based steel companies of Chhattisgarh and NMDC has considered the current market scenario of steel and iron ore and took informed decision to rationalize the prices, it said.
Some merchant miners at Odisha, including OMC (Odisha Mining Corporation) reduced the iron ore prices by Rs 500 per ton in their recently concluded auction, but still could not dispose of the entire quantity, NMDC said.
New mine closures have slowed down significantly since the Easter weekend, but many mines that closed in March and early April have announced extensions of their shutdowns.
As countries extended their quarantine period, mining stayed a part of non-essential service in Peru. In South Africa and Canada, mining was declared essential and operations resumed by mid-April.
Brazil in dire straits
Brazil, unlike many other countries, has not uniformly enforced a lock-down, with the result being widespread increase in Covid-19 infection rates which later saw the U.S. ban flights from Brazil. The worsening covid-19 crisis is making waves in the commodities world with reduced iron ore shipments from the South American country lifting the price of the steel-making material by 30% to $100 a ton. There could be more to come with some analysts forecasting a return to last year’s peak price of $125/t, an unexpected rise also caused by events in Brazil.
This year’s setback is Covid-19 and its potential to cripple Brazilian mine and port operations. Adding to market pressure, which has already seen the benchmark ore price rise from around $75/t to latest trades at $98/t, is strong demand for steel in China as it stimulates economic growth after its Covid-19 lock-down.
China produces around 1bn tons of steel a year and consumed 1.5bn tons of iron ore last year – around 70 per cent of global seaborne supply.
The political repercussions of what is happening in Brazil are also spreading beyond the country’s borders. This might be a factor in China opting to not escalate a dispute with Australia which has already seen sanctions placed on imports of Australian beef and barley.
Australian miners have been concerned that they would be the next target in a Chinese campaign mounted as a reprisal for Australia’s leading role in calling for an international inquiry into the source of the deadly virus.
Brazil’s problems appear to have prevented a worsening of the trade dispute because of Australia’s importance as a supplier of iron ore to China’s steel mills which have returned to full production.
Australia sitting pretty?
Stockpiles of iron ore at Chinese ports have been falling along with steel inventories at steel mills in a double-barreled example of the price-driving tightness in the iron ore market.
Despite their differences over an inquiry into Covid-19 geography has made China and Australia natural trading partners.
Australia’s ports are only 12 sailings days from China while the sailing time of a big ore carrier from Brazil is 45 days. The latest mine production data from Brazil shows a 12% decline in iron ore shipments compared with last year while two of Australia’s major producers have lifted production, Rio Tinto by 7% and Fortescue Metals by 24%.
McKinsey & Co, a management consultancy, estimates that the production disruption in countries such as Brazil and South Africa could see a 5% fall in global iron ore production creating an almost perfect storm for Australian miners.
Macquarie Bank said in its latest iron ore research that it expects “material upside to earnings for Australian iron ore miners from next year and beyond.” Credit Suisse, a leading financial services company, expects the iron ore price to rise above $100/t but not for long if Brazil can restore exports.
India expected to benefit in FY21
Chinese steel mills, which have resumed normal production, are banking on India to tide over the shortage in supply from Brazil. Current trends show that India may double its iron ore exports to China during the current fiscal. Last year, Indian miners had exported close to 26 million tons of iron ore to China. During the first two months of the current fiscal, Indian traders have shipped around 8 million tons to the Chinese steel mills. In Brazil, the production of key steel-making raw material has come down drastically due to widespread Covid-19 infections. In Australia, the production was affected due to a tropical cyclone. India, which was among the top exporters in the world till a decade ago, is now looking to export its unused quantities.
A sudden shortage in supply from Brazil and rise in demand from China has resulted in the upward movement of iron ore prices. Currently, the prices for 57-58% Fe grade iron ore are hovering around $68 per ton, a rise of 21% over $56 per ton traded a month ago. Similarly, prices of iron pellets have increased 18% to $107 per ton from $91 per ton at the beginning of April.
This is the second consecutive year Brazil has seen disruption in iron ore output. Last year, a fatal dam collapse forced Brazilian miner Vale SA to cut a quarter of its production. Recently, Vale reported an outbreak of the pandemic at its mines causing disruption in the production.
Disruption in the supply of iron ore by the world’s top two exporters – Australia and Brazil – has created a huge opportunity for India to supply its low-grade material to China, the largest consumer in the world.