Indian iron ore pellet makers raise supply concerns

Pellet manufacturers in India have flagged concerns about iron ore supply issues in the domestic market, although Chinese buyers of Indian pellet remain indifferent because of ample stocks at China's ports.

The Pellet Manufacturers' Association of India (PMAI) has written to the government highlighting a shortage of iron ore supply. "We understand that a lot of auctioned mines have not started production even though leases have been executed," PMAI told Argus.

The Indian parliament passed an amendment to its mining legislation in 2015, stipulating an expiry date of 31 March 2020 for all existing non-captive mining leases in the country and 31 March 2030 for captive mines. Several mines in Odisha, the country's top iron ore producer, were auctioned ahead of the 31 March deadline.

"We understand that almost 90mn t/yr of production capacity, as per environmental clearance, was auctioned, which works out to 7.5mn t/month. If we consider 80pc as the minimum that new mine owners dispatch, the total quantity dispatched on a pro rata basis in July should have been 6mn t/month. To our knowledge, the total dispatch in July has been around only 33,000t," PMAI told Argus.

"Barring a few exceptions, all mines have executed leases and were in a position to start dispatches from 1 July. But no supply has come into the market and there is a huge supply shortage because of which a lot of our member plants are under threat of imminent closure and there is an overall threat to the already-fragile steel industry," it said.

"In the case of non-auctioned mines, the proportionate production and dispatch each quarter should be 15mn t, but only 8.3mn t has been achieved during April-June," PMAI said.

Concerns about iron ore supply in India have been more pronounced in recent weeks as the downstream sector is gradually picking up, unlike earlier in the year when Covid-19 lockdowns severely dented downstream demand, a pellet maker said.

The improvement in Indian steel markets is underlined by a 4,000 rupee/t ($53.50/t) rise in domestic hot-rolled coil prices since 17 July.

Integrated steelmakers in India meet their iron ore requirements through captive mines and so are typically insulated from any disruptions to spot market supplies.

The pellet maker said another reason for the current supply concerns is the approaching exhaustion of iron ore stockpiles that were dispatched earlier to meet demand, despite reduced production at the mines.

"The old lessees have government permission to continue selling the stockpiled material until 30 September, so once they reach the deadline exports and domestic supply of iron ore may come under pressure," he said.

A source at a second pellet maker said production at the auctioned mines has been subdued since February this year, despite mining being regarded as an essential service during the country's nationwide lockdown.

"According to mining rules, the auctioned miners are required to dispatch 80pc of the average production volume of the last two years. For non-auctioned mines, all production is required to be dispatched but that is not happening," he said.

He said cutting pellet exports was not a viable option. "The capex on pellet facilities is quite high. Of India's 90mn t pellet capacity, 30mn t is still idle and taxing exports will kill the pellet industry," he said.

An iron ore producer said a combination of factors — the monsoon season, a shortage of labour because of the Covid-19 outbreak and mining auction processes — have all contributed to the tight domestic supply.

"It will affect both pellet producers and sponge iron producers that use pellets and lump as raw material," he said.

A third pellet producer said while its facilities are not facing any iron ore supply shortage, the onset of monsoon rains, limited transportation because of Covid-19 restrictions and increasing steel demand are likely keeping supply "less than normal".

Chinese buyers unaffected

Chinese buyers of Indian pellet remain indifferent to any existing or potential supply disruptions, with stocks of the direct-charge material breaching 10mn t at the country's ports.

India exported 20mn t of iron ore over January-June, more than double the volume during the same period last year. Indian iron ore exports mainly comprise low-grade fines, which are typically used by Chinese mills when they are looking to reduce input costs. Indian-origin pellet also accounts for the bulk of pellet sold to China in the spot market.

"I have not heard of any pellet supply issues from India, and I do not think the Chinese market cares about it as weekly pellet inventories are still going up and pellet demand has not picked up," a Beijing-based trader said.

"Current inventories, which exceeded 11mn t as of 14 August, have capped the pellet price rise," a Shanghai-based trader said.

A south China-based trader said Chinese steel mills have increased the usage of pellet in blast furnaces, but many are using pellets produced using domestic concentrates as they are more cost-effective. "The scope of increasing the pellet ratio is also not much for mills in the south that mostly use imported pellet," he said.

The Argus 64pc Fe, 3pc alumina pellet index stood at $123/dry metric tonne (dmt) cfr Qingdao on 18 August, up by $3/dmt from last week. The differential between 2pc and 3pc alumina, 64pc Fe pellet narrowed to $5/dmt, down by $1 from last week.

By Deepali Sharma and Kitty Xie