Steel: Ceding the iron ore advantage? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Steel: Ceding the iron ore advantage?

Dec 18, 2006

Iron ore is the source of primary iron (a key raw material) for the world's iron and steel industries. It is therefore essential for the production of steel, which in turn is a barometer of a country's standard of living and growth of economy. It is the 4th most plentiful element in the Earth's crust and at about 23 bn tones of iron ore reserves, India is the 3rd largest exporter of iron ore in the world, after Australia and Brazil. In 2005-06, India produced 155 m tonnes of iron ore. While, exports were 89 m tonnes, domestic consumption was 58 m tonnes, leaving a surplus of 8 m tonnes. India's net reserves of iron ore increased as improvements in mining and steel making enabled miners to tap less rich ore, which bodes well for the longevity of India's under-exploited high grade iron ore deposits. Domestic market scenario
Since 2000-01, the iron ore production has increased at a CAGR of 14% on account of increase in steel production and consumption. The demand for iron and steel industry products have historically grown at the rate of 1.2 times the GDP growth rate and this is likely to continue in the future as well. Since the country's GDP is expected to grow at 8% annually, we expect the steel industry in India to login a growth rate of 9% to 10% annually. As mentioned earlier, iron ore being a key raw material for steel industry, its demand is also expected to grow in line with the growth in the demand for steel.

* also includes exports

As can be seen from the chart, iron ore production has increased with the growth in steel production. With reserves that touch 23 bn tonnes, the Indian Steel industry is self sufficient in terms of iron ore availability. Further, 14% of total reserves is high grade, the one that contains around 65% of iron. Hence, on account of ample availability of Iron ore reserves, India produces 62% of steel using blast furnace as against developed nations like USA, where Electric arc furnace is used for 50% of steel production. As mentioned in the previous article click here, electric arc furnace route is used to produce steel using scrap steel on account of shortage of iron ore availability. Steel grade produced using EAF route is comparatively of lower purity compared to BOF process using iron ore.

Being rich in iron ore reserves, Indian steel industry has an inherent long-term advantage over the international players and need not worry of regular raw material supply. Hence, while the rising raw material prices are squeezing steel producers margins, large players like Tata Steel and SAIL that have their own captive mines, have been able to limit the damage to an extent. Little wonder, other players are now rushing to acquire mining lease contracts to bring down their operating costs.

Exports overview
The mining industry in India is mainly dependent on exports. India is rich in iron ore reserves and exports account for as much as 50% of its total iron ore production. The iron ore exports in India have increased from 31 MT since 2000-01 to almost 90 MT in 2005-06, at CAGR of almost 24% annually, with China accounting for 50% of India's Iron ore exports.

As the industry is export driven, Indian iron ore prices follow international trends. During 2003-2006, iron ore prices grew at CAGR of 29% annually. With the growth in the demand for steel and new capacities lined up, demand for iron ore is increasing in the domestic as well as international market. Due to strong export demand for domestic ore, iron ore prices are expected to remain firm.

Exports: The bone of contention….
Losing our only advantage by allowing free exports to our own rivals is the controversy that prompted the government to appoint a high-level committee called ‘Hoda committee' to review the National Mineral Policy and suggest amendments to the Mines and Minerals Development and Regulation (MMDR) Act 1957.

The Indian steel industry's only advantage vis-à-vis its international competitors is the high quality of Indian iron ore which gets compensated by high costs of energy, coking coal, interest rates and other financial costs and technology. Thus, the controversy with regards to iron ore exports revolves around diverse views of different stakeholders viz, the state governments, steel producers, Steel ministry and Mining ministry.

From the point of view of the mining department, India should continue with large-scale iron ore exports as production has outstripped domestic demand and the known reserves would last for another 100 years even after taking into account the consumption projections. Further, the exports largely constitute fines and concentrates, which would otherwise go waste.

However, the Indian industry argues that it hopes to surpass the expected 2020 levels of production by 2012 itself and when that happens, the country's reserves will be exhausted in 55 years. As per the steel producers view, the country's consumption is rising and is expected to match China's 350 m tonnes from 42 m tonnes now, much sooner than expected.

Thus, considering the diverse viewpoints, exports may not be completely banned but there could be a cap and imposition of high export duties. Under the existing policy, India allows free export of iron ore with a ferrous content of less than 64%, but a licence is needed for selling high-grade iron ore. The Hoda Committee has recommended that an export duty be levied on exports of iron ore in lump from grade of iron ore with iron content above 65%. The existing regime of canalization and export licensing should be discontinued. To review the various recommendations made by the Hoda committee two more committees have been set up.

Given the inherent competitive advantages it imparts to the domestic steel companies, we believe the policy makers will not resort to steps that will be detrimental to the long-term sustenance of this advantage. Hence, while homegrown steel majors like Tata Steel and SAIL should be able to feed their furnaces with cheap iron ore for some more time to come, strategies to topple competition, both on the home turf as well as the international markets should be uppermost in their minds currently.

Equitymaster requests your view! Post a comment on "Steel: Ceding the iron ore advantage?". Click here!


More Views on News

TINPLATE 2020-21 Annual Report Analysis (Annual Result Update)

Nov 16, 2021 | Updated on Nov 16, 2021

Here's an analysis of the annual report of TINPLATE for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TINPLATE. Also includes updates on the valuation of TINPLATE.

SUNFLAG IRON & STEEL 2020-21 Annual Report Analysis (Annual Result Update)

Nov 15, 2021 | Updated on Nov 15, 2021

Here's an analysis of the annual report of SUNFLAG IRON & STEEL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SUNFLAG IRON & STEEL. Also includes updates on the valuation of SUNFLAG IRON & STEEL.

A Peek into Tata Steel's Stellar June Quarter Performance (Views On News)

Aug 13, 2021

Tata Steel's June quarter profits were higher than the full-year profits reported for fiscal 2021.

Shyam Metalics IPO: Key Points to Consider (Views On News)

Jun 12, 2021

Shyam Metalics is commanding a strong grey market premium ahead of its IPO next week.

Tata Metaliks Share Price Jumps 8% After Turning Profitable (Views On News)

Jul 14, 2021

A peek into Tata Metaliks' stellar June quarter performance.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 26, 2021 (Close)