Mining industry needs scientific tools to mitigate risks due to fluctuating iron ore prices: FIMI

Miners' body FIMI on Friday stressed on the need to have a "structural mechanism" in place for iron ore pricing, saying risks persist for both suppliers and sellers in the market due to fluctuation in rates of the main ingredient used in steel making.

It also emphasised on adopting scientific tools for monitoring on various fronts like quantity, quality and pricing of iron ore in a bid to mitigate the risk due to fluctuating prices.

"The mining industry faces financial risks to its profitability, cash flows and in entire value chain. The risks have shown to arise as a consequence of volatility in the exchange rates, interest rates and commodity prices," FIMI Vice President R L Mohanty said.

In India, there is no structural mechanism for iron ore pricing and it directly depends on the demand and supply mix, he said.

"There is risk involved for both supplier and seller in the market due to fluctuating pricing," Mohanty explained while speaking at a virtual event on 'Risk management for iron ore markets and prices'.

"There is a need for increasingly scientific approaches to the estimation of risks in mining. To mitigate the risk there is requirement of scientific tools to inculcate improvement in quantity, quality as well as pricing of iron ore. So that, mining industry can have access to security in future market," he said.

India, he said, produces around 220 million tonnes (MT) of iron ore annually, mainly mined in the Odisha, Chhattisgarh, Karnataka and Jharkhand.

With steel demand rebounding post-Covid-19 outbreak, iron ore has been one of the best-performing commodities in a year of high volatility across multiple asset classes -- both globally as well as in India.

As such, risk management for iron ore has never been more important.

Considering the uncertainties in the commodity cycle, it is essential to understand the current dynamics of steel/iron ore markets and business implications in a bid to better manage the risk of volatile iron ore prices and supplies for all stakeholders, including mining companies, steel plants and traders, Mohanty said.

Hedging is one of the risk management tools for allowing mining companies to protect their profitability, revenue flows and balance sheets from the damaging effects of the commodity prices due to downside movements, he said.