Mining Companies Raises Iron Ore Prices

Mining companies have raised the iron ore prices on the back of rising demand and supply shortages in the country. The prices of the higher grade iron ore of 63 per cent Fe content have been raised between 8-10 per cent. After the hike the iron ore price of 63 per cent iron lumps has reached Rs 5,400 per tonne and the lower grade iron ore fines are trading at about Rs 2,800 per tonne.

The hike in the iron ore prices is also because of the supply shortages in the country. The mining ban in Karnataka and the lower production in Orissa and Goa have resulted in higher iron ore prices. However, in a recent development, the Supreme Court has green-lit the mining of more than 50 hectares in Karnataka after their environmental plans are approved and with certain conditions in place, including a reclamation and rehabilitation (R&R) plan. This will address the supply issue in the country but these mines will take 3-4 months to resume production until then the iron ore prices will remain firm in the Indian market.

Steel companies in the month of March increased the long steel prices by Rs 1,000 per tonne on the back of improving demand from the infrastructure space.  However, the hike in the steel prices will not be reflected on the margin front for the March quarter as the 20 per cent hike in the railway freight charges will eat away the benefits arising from the price hike.

Further, the recent hike of the iron ore prices will put pressure on the margins of the steel companies during June 2012 quarter. The steel prices in the international markets are trading lower than the domestic prices and any further increase in the domestic prices from here on will lead to cheaper imports. Therefore this time there is very little scope for the steel companies to raise the steel prices in the coming quarter.

The problem does not seem to end here for the steel companies. The rupee has depreciated further by 4 per cent in the month of April to Rs 52.5 per USD. The higher rupee will lead to higher cost of imported coking coal - a primary source of energy in steel production. Almost 60-65 per cent of the coking coal requirement in India is met through imports due to its limited reserves, which is only 4 per cent of all types of coal reserves in India.

Therefore, with higher iron ore prices, high freight cost and weakened rupee we foresee a higher impact on the margins of the domestic steel companies for the June quarter. The scenario for the steel industry will get worse if the domestic consumption of steel slows down since the companies will not be in a position to implement any price hike. In conclusion we believe that the demand in the June quarter will slow down on the back of the monsoon period, bringing a halt to any type of infrastructure or construction activity.