India picks worst time to resume iron ore mining — analysts

India picks worst time to resume iron ore mining — analysts

India's private iron ore producers are likely to suffer the effects of high costs, low prices and a poor export market, says BMI.

Adding to an ever-increasing global oversupply of iron ore from Australia and Brazil, India's top ore exporting state of Goa resumed production on Monday, led by Vedanta Resources (LON:VED), after an almost three-year hiatus.

The move, however, couldn’t come at a worst time, analysts say, especially when it comes to private firms. According to the latest report from BMI Research, production from restarted mines will be hit by high costs, low prices and a poor export market. Instead, the firm is predicting that state-owned miners will be the ones leading the nation’s production growth, which it estimates at 3.8% a year from now until 2019.

Iron ore mining resumption from the private sector will be hampered by several factors, says BMI:

First, high taxation costs will limit output growth. Although the government has cut the export duty from 30.0% to 10.0% for iron ore below 58.0% grade in April 2015, further supportive measures could still be implemented in the current environment of low prices.

Second, a three-year hiatus in production has resulted in a shift in iron ore consumption patterns by Chinese steel mills. This will create some difficulty in finding buyers of Goa's iron ore products. According to anecdotal evidence, steel mills in China, which before the ban used low-grade iron ore from India, have now become accustomed to using medium grades of iron ore from Australia.

Third, environmental clearances and other bureaucratic hurdles will continue to hinder mine production growth.

The Supreme Court of India banned mining in Goa in 2012 as part of a clampdown on illegal mining, freezing shipments that reached about 50 million tonnes in 2010/11. It lifted the ban in April last year, but companies had to wait to get environmental and other clearances from the government.

India has cut the export duty on low-quality ore to 10% from 30%, mainly to help companies sell Goa's ore that contains less than 58% iron.

India picks worst time to resume iron ore mining — analysts

Source: BMI, USGS.

Most Indian steel companies either do not have the technology to use low-grade iron ore competitively or their location makes transportation costs prohibitive.

On a global level, iron ore prices have weakened considerably over the last twelve months, though have recovered slightly in the past few weeks. Ore delivered to China's Qingdao port reached Friday a fresh six-week high, according to The Metal Bulletin. The index calculated to $57.02 per tonne whilst the MBIOI-58 Premium Index saw a smaller rise to $53.06 per tonne, also a six week high. After falling yesterday, the MBIOI-65-BZ has recovered strongly, pushing up to $64.50/tonne, the indexes highest level since the July 2.

But the rally is not likely to last, many believe, as miners continue to be at the brink, with breakeven prices that gives them little room to move. UBS estimates the breakeven of BC Iron at $52 a tonne, Mount Gibson at around $49, and Fortescue Metals Group at $44 a tonne. Gina Rinehart's Roy Hill, expected to ship its first ore this September, has an assumed break-even price of $41 a tonne.

On the supply side, output expansions by major iron ore mining companies such as Vale (NYSE:VALE), Rio Tinto (LON:RIO), and BHP Billiton (ASX:BHP) keeps feeding a global oversupply. The worldwide surplus of seaborne iron ore supply is expected to rise to 437 million tons in 2018, from an expected surplus of 184 million tons in 2015. A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term.