India’s iron ore rush

India’s iron ore rush

Steel makers crowd into India chasing its cheap iron ore reserves.

Is there enough for everybody? Financial Express July 15 2006 Here’s a simple statistic: if all the new announcements for steel plants in India actually get set up on ground, the country will have new facilities toting up 175 million tonnes —over 4.6 times today’s installed steel-making capacity. Players such as South Korea’s Posco and the Rotterdam-based Mittal Steel, now Mittal-Arcelor, lead the race with plans to set up 12-million-tonne steel plants each in Orissa as also Russian steel major MMK, which has announced a 10-million-tonne factory in the state. Anglo-Dutch steel maker Corus is also said to be eyeing Indian shores.

With a boom in housing, infrastructure, automobiles and white goods, domestic steel consumption is at an all-time high of about 39 million tonnes and has been growing at a strong 7%-8% annual clip but even this robust growth will not be enough to absorb the steel the new plants will produce. In fact, domestic demand will have to rise to over 13% every year from today to 2020 to be able to absorb the new capacity planned. That clearly is a tall order and prospects of steel exports not clear yet. Which begs the question: is it the growing demand for steel in India or something less sublime like iron ore driving these investments?

Industry insiders point out that the flurry of steel projects in recent months is linked to the need to secure precious iron ore resources. Almost 1.6 times the amount of iron ore is required to manufacture a tonne of steel. And India is attractive on account of its iron ore deposits, which significantly brings down the cost of production of steel.

Says Seshagiri Rao, director, finance, Jindal South West (JSW) Steel: “Input costs are almost 60% abroad as opposed to about 45% in India. Labour is also cheap here, almost 4%-5%, as opposed to 25% in international steel-producing markets. On an average the operating profit margins of Indian steel companies is about 30%. For international steel companies the figure is far lower.” Adds Sachin Wankhede, steel analyst at Care Ratings, Mumbai: “India is actually a benchmark for global steel players as far as manufacturing of steel goes. This is so because of the presence of iron ore in the country.”

According to the National Mineral Development Corporation, India’s proven iron ore reserves are about 18 billion tonne while other estimates put it at 20-24 billion tonne. Of this, Orissa and Jharkhand alone have about 4.1 billion tonne (the state’s geological and mining departments say that the proven reserves are higher at 5.5 billion tonne) and 3.2 billion tonne of iron ore reserves respectively. Chattisgarh, on the other hand, has reserves of about 2.2 billion tonne. Going by the steel capacity announcements made by both Indian and foreign players the demand for and pressure on these scarce resources is considerable. For instance, Sanak Mishra, chief executive officer of Mittal Steel Jharkhand Ltd says his company would need about a billion tonne of iron ore to manufacture 12 million tonne of steel over a 50-year-period.

Posco executives, on the other hand, maintain that about 600-million tonne of iron ore is what they require for their steel operations over 30 years. Going by the number of steel memoranda of understanding signed by the Orissa and Jharkhand governments, which is about 43 and 39 respectively, the iron ore requirement for steel operations in these states alone would be between 6-6.5 billion tonne over a 30-year period. (See below: "The story from ferrous country".)

Tata Steel and the Steel Authority of India — the largest private and public sector steel companies in the country —have captive mines to take care of their expansion needs in the country (paid for at a cess of just Rs 27 a tonne). That is not so with other organised players. For instance, Essar Steel has no backward linkages to iron ore mines, while JSW Steel, Jindal Steel and Power Limited (JSPL) and Ispat have partial linkages to the same. Says Vikrant Gujral, vice-chairman and chief executive officer, JSPL, “Our Raigarh unit in Chattisgarh has captive iron ore mines supporting it, while our proposed units at Orissa and Jharkhand would have to have the same.” JSPL is looking to add 6-million-tonne and 5-million-tonne steel plants in Orissa and Jharkhand and is believed to have bagged mining leases there.

Rao of JSW Steel, meanwhile, which is undertaking expansion work at its Vijaynagar unit in Karnataka increasing capacity from 2.5 million tonne to 3.8 million tonne, subsequently going up to 7 million tonne, says that about 40% of its ore requirement at the moment is generated in-house. The balance has to be procured from the open market. “This obviously increases our costs,” he says. Indeed, the prospect of escalating input costs looms large over steel majors that have significant capacities to set up, but have no mines to support their ventures. “Prices of iron ore in the open market have been firm and will continue to be so as demand grows,” says Kanan Shah, steel analyst at Networth Stockbroking. Price of a tonne of iron ore is about Rs 3,100 in India, while the cost of mining a tonne of iron ore is just about Rs 1,100 and lesser at around Rs 300 for captive mines. With the global iron ore market controlled by a few mining companies including CVRD, Rio Tinto and BHP Billiton a reduction in price is not in the offing. “These players determine the price of the ore in the open market. So there is no way one can escape them,” says Amit Agarwal, steel analyst at Bric Securities.

Iron ore exports have been traditionally higher than domestic consumption—standing at 80.9 million tonne and 65.9 million tonne in 2005 —which the government is keen to alter. But with players such as Posco allowed to export iron ore, which the company says is only up to the extent it will import necessitated by the low quality of Indian ore, has upset steel-makers in the industry. Mishra of Mittal Steel Jharkhand, meanwhile, says that the MoU signed with the Jharkhand government last year was actually “devoid of the subject of iron ore resources”. “That is because there was a legal dispute going between SAIL and the Jharkhand government over the Chiria deposits, which we have expressed an interest in. We are open to alternative deposits as well,” he says .

The fear of depletion of precious iron ore reserves drags, but the bigger issue, says a steel ministry official, is one of ‘sufficiency’. “The problem is that when you enter into a lease for a 30-50 years, you increase the chance of rent-seeking behaviour among the lessees and keep out others who may be able to use the resource more efficiently,” he says, adding the solution may be to go in for shorter lease-terms.

Depletion is not a worry to be brushed aside. At 18 billion tonne, India lags behind countries such as Australia (40 billion tonne). Brazil, on the other hand, has iron ore deposits of 17 billion tonne. The production of iron ore, for the record, increased by 21% in 2005 moving from 120.6 million tonne (in 2004) to about 146 million tonne. If the 175 million tonne steel-making capacity actually comes on stream (in addition to the current 38 million tonnes), India’s iron ore deposits could run out in as less as 50 years. There is always the possibility of discovering new reserves but that’s still in the realm of uncertainty.

As the rush into iron ore mining in India gathers pace, a more realistic and market-linked pricing will surely emerge displacing sweetheart deals between steel companies and governments. Until then, the lure of iron ore will continue to draw the big steel players to India.