India's steel needs spell less iron ore for China
(Reuters) - India's export taxes on iron ore and plans to ramp up supplies to domestic steel mills will cut shipments to key buyer China in the long term, and aid miners wrangling for a steep hike in term prices, if not scrap them.
The world's third biggest exporter of iron ore will use more at home, analysts say, stepping up pressure on China as it negotiates with key suppliers such as Vale (VALE5.SA), Rio Tinto (RIO.AX) and BHP Billiton (BHP.AX) BHP.L, who are keen to boost term prices 70 percent or more.
India's share of iron ore imports by China, chiefly on the spot market, fell to 17 percent of a record 628 million tonnes in 2009, versus 20 percent in 2008, ceding ground to Australia and Brazil in a race to feed the world's largest steel producer.
"In the longer term we are going to slip down in China's iron ore market as steel demand is growing in India," said Rakesh Arora, an associate director with Macquarie Group in Mumbai.
"Indian iron ore exports to China could decline by 5 to 10 percent in the next 5 years. Naturally China will feel the pinch and that will sustain iron ore prices."
In January, India clung on to this No. 3 spot, sending 9.3 million tonnes to China, or an annual increase of 5.1 percent.
"Australia and Brazil are expanding capacity and will continue to increase their dominance," Arora added.
Indian trade officials agree the country's annual exports will not exceed the current figure of about 106 million tonnes, while industry exert Calum Baker, research manager for steel raw materials at CRU Analysis, said they would actually decline.
"I think we are probably approaching a point where Indian exports are peaking and I think they will fall away," Baker said recently, adding that he expected Indian iron ore to get priced out of the global market.
Iron ore prices in India climbed above $100 a tonne late last year to reach a little under $140 a tonne this year amid bullish forecasts for the rest of the year, which prompted the government in December to double its tax on iron ore lump exports to 10 percent and add a 5 percent levy on fines.
Global spot market prices for iron ore surged more than two-fold in the last year on strong demand from China and economic recovery in Europe and the United States. Iron ore prices remain near $130 a tonne.
As iron ore prices surge, the Indian government could move to rein in exports still further, one analyst said.
"Another duty (tax) hike is possible. They might try to do other things to restrain exports. I won't be surprised," said Pawan Burde, research head at PINC Research in Mumbai.
DEMAND FROM TWO BILLION PEOPLE
India's greater focus on domestic demand comes as it grapples with concerns similar to China's, trying to hold down inflation while battling to meet demand for cars, homes and other steel-related goods from populations of more than 1 billion each.
Indian steelmakers have projected capacity at 90 million to 100 million tonnes by 2012, an increase of at least 50 percent from 60 million tonnes now, which will boost their ore demand to about 150 million tonnes, or 67 percent, from 90 million tonnes.
India's surging demand for iron ore, with low-quality grades making up about 70 percent of last year's output of 222 million tonnes, has driven miners to invest in plants to make pellets.
Pellets, made of lower grade powdery iron ore fines once thrown away, but now melted down to make higher grade nodules, are ideal for feeding blast furnaces in steel mills.
"Pellets are a new trend. They can improve the input-output efficiency of domestic steel plants," said Sanjeev Panda, an analyst at Karvy Stockbroking in Hyderabad.
Companies such as Essar Steel, JSW Steel (JSTL.BO) and state-run miner NMDC Ltd (NMDC.BO) are pursuing the process, with about 5 percent of the roughly 150 million tonnes of India's iron ore fines estimated to become pellets in the next five years, though the resources needed could be expensive, analysts say.
But as the trend gathers momentum, China, the biggest buyer of lower-grade Indian ores, stands to lose out the most.
Firms such as Tata Steel Ltd (TISC.BO), the world's eighth-largest steelmaker, are also bracing for higher iron ore prices and scouring for supplies as they seek to boost output.
"Iron ore (spot) prices are headed as much as 35 percent higher this year and will likely pressure the profit margins of steel companies," Tata Steel Ltd Vice Chairman B. Muthuraman told Reuters at an industry conference in San Francisco this week.
As steel demand and prices rise worldwide, companies that can make pellets stand to gain a supply edge.
"Value-added iron ore will catch on, as the easy days of getting high quality lumps are over, with demand rising," said Macquarie's Arora.
Miner Siddharth Rungta, president of the Federation of Indian Mineral Industries, which has 400 members, plans to build a 2-million-tonne a year pellet plant, citing export tax rates and government plans to boost domestic steel output.
"Mine owners are investing money," he said, adding that a one-million-tonne pellet plant can cost $77 million to set up.
Another executive with a large mining firm that plans a 1-million-tonne pellet plant said steel firms and miners were both investing in pellets.
"I see about 30 percent of India's iron ore fines getting converted to pellets in the next three years," he said.
(Additional reporting by David Stanway in Beijing; Editing by Himangshu Watts and Ed Lane)