China is perhaps the single most important country today when it comes to the steel industry. It is one of the largest producers of iron ore in the world. But its steel making capacity has reached such huge proportions that it still needs to import iron ore in very large quantities. Normally, iron ore is supplied under long term contracts. But the quantity of Chinese imports is so large that there simply isn't that much supply available under long term contracts. As a result, a spot market for iron ore has evolved.
One of the key suppliers in this spot market is India. Now, it does seem ironical that India should be exporting iron ore at a time when it is really trying to ramp up its steel production. Unfortunately, it is true because India's steelmaking capacity has not grown as fast as it should have. But the situation seems to be changing of late.
As per a leading business daily, India's share of iron ore imports by China fell to 17% 2009, down from 20% in 2008. There are a
slew of brownfield and green field steel projects lined up in India. As a result, the demand for iron ore from within India is growing. Plus there is also the fact that the Indian government has imposed export taxes on iron ore. In fact, as shown in the chart below, the Australian Bureau of Agricultural and Resource Economics (ABARE) predicts that India's export of iron ore will keep declining while China's imports will keep increasing.
Another important reason India's iron ore exports could decline is because the government is likely to increase taxes on exports as Iron ore prices rise. And the prices are rising. One tonne of iron ore costs about US$ 130 today. That's more than a two fold increase in the last year.
In our opinion, greater consumption of Indian ore within India is a welcome trend. Converting iron into steel adds more value, which can then be exported at better prices. Of course, we are more likely to consume the steel domestically rather than export it. After all, steel is used in industries like infrastructure, housing, automobiles and consumer durables. All of these are likely to witness strong growth in the days ahead.