Awaiting market upsurge

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Miners will have to ride the depressed market scenario until economy picks up again

The Supreme Court has lifted the ban on iron ore mining in Goa, India’s largest iron ore exporting state, much to the relief of mining companies and all stakeholders. Mining and exports of iron ore account for around 25 per cent of the state’s revenues and therefore the state suffered maximum from the ban. The 19-month ban imposed in 2012 was because of excess illegal mining in the state with negative impact on the environment. And the Supreme Court had to intervene. The court appointed a panel to look into the state of mining activity and based on the panel’s recommendation, the Supreme Court has capped the mining at 20 million tonnes. The panel comprising justices AK Patnaik, FMI Kalifulla and SS Nijjar has ordered the cancellation of mining leases that were issued after 2007 in cases where the maximum renewal period of 20 years had been completed.

The ban was imposed at a time when the global economy was slowing and the ‘coalgate’ scandal came to the fore. Prior to the ban, around 85 mines were producing about 45 million tonnes iron ore per year. The ban in Goa and Karnataka further contributed to slowdown in the economy and all stakeholders involved with mining suffered. Over one lakh jobs were lost with related assets like trucks, dumpers, barges, etc, lying idle. Reports suggest over 18,000 vehicles have lost business. According to Atul Jadhav, president of the Goa Barge Owner’s Association, over 300 barges are lying idle.

So is the lifting of the ban great news?

Depends. The lifting of ban itself does not mean that the mining can start immediately. Clearance from the central environment ministry is required along with the state government lifting the ban and this could take some time. The ban in Karnataka was lifted in 2012 but mining is yet to pick up to earlier levels. In addition, the elections are in full swing and by the time the next government takes charge at the Centre, the monsoon will start. Mining does not happen during the monsoon. So the earliest mining that can take place will be after September.

China factor

The timing of India’s entry into the iron ore export market may not be in the country’s favour. The days of super profits are gone. China is India’s largest buyer of low-grade iron ore. Its steel industry and iron ore traders blend this with high-grade ore (62 per cent iron content) from mines in Australia and Brazil. But China has been discouraging the large number of small-scale blast furnaces that use low-grade iron ore (30 per cent or below iron content) in favour of furnaces that use high-grade iron ore that are less polluting but have higher overheads. In fact, to lessen the dependency on imports, China has stepped up domestic production of iron ore and it reached 1.4 billion tonnes last year.

Australia, the world’s largest miner and exporter of iron ore with a production of over 270 million tonnes per year, has been facing an excess supply of iron ore by around 35 million tonnes. This along with decline in China demand caused the prices to fall. The current iron ore prices in China are lower by 16 per cent and last week were quoting in the region of $113 (62 per cent content). It would have dropped further had India continued to remain in the export market. Christian Lelong, the Sydney-based commodity analyst with Goldman Sachs group, predicts that the prices will average around $108 this year and may drop to around $80 in 2015. The mining cost of Indian iron ore is anywhere in the region of $50-60 per tonne. So lower international prices is bad news for Indian exporters.

Both BHP Billiton and Rio Tinto, the two largest mining companies, have invested heavily in developing newer mines and are placing their bets on lower operating costs to ride out this phase of low demand and excess supply.

The timing factor

At a time like this, India’s re-entry into the global supply chain will only add to pressure on prevailing low prices and that’s not good news for Indian miners like Sesa Sterlite, which is also India’s largest private sector iron ore exporter. From peak exporting days in 2010, when India exported 117 million tonnes and was the third largest exporter globally, the levels have fallen to around 17 million tonnes in 2013.

For the Indian economy, it’s critical that mining operations resume as the same will have a cascading positive effect on all stakeholders. In the meanwhile, Indian miners will have to ride the depressed market situation until the Chinese economy picks up again. Pundits, however, are sceptical if China will be returning any time soon to nine per cent growth days. It remains to be seen how India plans ahead.


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