The global iron ore market may be oversupplied for as long as half a decade, keeping prices under pressure, according to billionaire Anil Agarwal’s Vedanta Ltd., which plans to fight back by raising the quality of its output amid a global shift toward higher-grade material.
Supply will exceed demand for the next three-to-five years, keeping prices between $50 and $60 a metric ton for ore with 62 percent iron content, according to R. Kishore Kumar, chief executive officer of the company’s iron ore division. Weak prices and the rising preference for higher-grade supplies by China is hurting miners on India’s western coast, which ships out most of the nation’s lower content ores, he said in a phone interview from Goa.
The global market is in a state of flux, with lower-grade ore increasingly shunned in favor of better-quality material that’s less polluting as China seeks to clean up its environment. BHP Billiton Ltd., the largest mining company, says there’s a new reality as the flight to quality boosts the premium users will pay for higher-grade ore. The trend has gathered pace as benchmark prices gyrated this year, with the commodity falling into a bear market last month.
“Demand for higher-grade ore will continue as long as the steel margins support their purchase of higher grade,” said Kumar referring to mills’ profitability, which has risen this year. “The lower-grade is getting discounted, the higher-grade is getting an excessive premium. So when the margins of steel, whenever they change, it may change this equation.”
Benchmark ore with 62 percent content was $62.42 a dry metric ton on Tuesday, after losing 21 percent last month, according to Metal Bulletin Ltd, while 58 percent content material was $36.69 and 65 percent shipments were $83.60. The spread between the grades has ballooned since the start of 2016.
To respond to the changing dynamics and compete better with other producers, the unit of London-listed Vedanta Resources Plc. plans to raise the iron content in its ore to 58-to-59 percent from 54-to-57, Kumar said. That would increase production costs for the miner, which has capacity to produce 7.8 million tons a year of lower-grade ore from mines in Goa and Karnataka, he said.
The inability to export lower-grade ore has led to the build-up of inventories at ports and mines, with Vedanta sitting on about 4 million tons, about half of which it plans to upgrade to higher content, Kumar said. Vedanta exports most of its production and now plans to sell to mills on the west coast after the quality upgrade and to its own pig iron plant, he said.
Shares of Vedanta Ltd., which also produces aluminum, zinc, copper and oil, have rallied 55 percent in Mumbai this year. They rose 1.9 percent to 335.45 rupees at 12:32 p.m. on Tuesday.
India usually exports lower grades to China, Japan, and Korea, with Goa as the biggest shipper before a ban on mining in 2012 due to environmental concerns. The curb was lifted two years later and exports have been recovering.
Overseas shipments rose to 31 million tons in the year to March 31—about half from Goa—from 5.4 million tons the previous fiscal year. In the four months to July this year, exports were 36 percent higher on year at 8.4 million tons, official data show. The global seaborne market is about 1.4 billion tons.
“Lower-grade is not having a good market,” he said. “So the best way for us is to move up the value chain.”