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Iron Ore: Challenging times ahead - Views on News from Equitymaster

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Iron Ore: Challenging times ahead

Sep 6, 2011

India has emerged as the fourth largest miner and the third largest exporter of iron ore. Iron ore is one of the main raw materials used in making steel. Currently, India has an estimated iron ore resource of 25 bn tons. The quality of the Indian resources is also excellent. Though India is one of the largest producers of iron ore in the world, it is still plagued with many problems threatening to destroy the industry.

Earlier it was thought that Indian iron ore reserves were in abundance. But then came the Chinese phenomenon. China's steel production has grown at a CAGR of 18.1% over the past decade. China's domestic iron ore is of lower quality and is produced through a large number of smaller mines. With rising steel production, domestic iron ore production was not enough to satisfy the demand and hence, China's reliance on imports increased significantly over the years. India also joined the bandwagon and started to export iron ore as there was low demand in India. So much so that more than 50% of iron ore produced was exported and the trend is still continuing.

However Indian steel industry has witnessed a boom in recent years. The Indian steel industry is expected to grow at a CAGR of 8.4% to reach 150 m tonnes by 2020. If the export of iron ore continues at this rate, then India's reserves may last only till 2050 and India may have to import iron ore in the long run to keep pace with demand.

Apart from this, Increasing environmental concerns are leading to stricter regulatory enforcement, which has adversely impacted iron ore mining in India. Older mines are getting deeper and new mining licenses are not coming through due to regulatory and governance issues.

Indian iron ore production too is likely to decline due to export ban in Karnataka and increased focus of government agencies in enforcing mining and transportation regulations to curb illegal mining. Higher royalties on iron ore mining have resulted in increased cost of mining and stricter enforcement of transportation permits have led to higher logistics cost.

All the above factors have already led to slowdown in iron ore production. With rich iron ore deposits throughout the length and breadth of the country, these deposits need to be protected for the future growth of the country. India has the gift of a long highway of this resource. Now what the future holds depends on whether it can drive through it on full throttle or allow potholes to slow down the journey.

In our next article in this series, we will see what strategies Indian steel companies can adopt to secure iron ore supply.

Iron Ore Challenging times ahead Series - Next | All Articles


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