India iron ore exports seen halved in 5 years

Lower shipments from world’s No 3 exporter should help bolster prices that have already more than trebled from late 2008, as massive increases in global supply are only expected to come through by 2015 and demand from top consumer China rises.

“Indian exports are in a structural decline as resource nationalism becomes a bigger driver behind policy. The policy is definitely not encouraging exports,” said Graeme Train, Commodity Analyst at Macquarie in Shanghai.

In a bid to curb overseas sales, India has raised freight rates and quadrupled export taxes on iron ore fines, the sandy material that typically contains 55-65 per cent iron and which comprises around 70 per cent of its annual output of about 200 million tonne.

Iron ore exports from India fell 17 per cent to 97.6 million tonne in the year to March, largely due to a ban on shipments from the key producing state of Karnataka. Analysts forecast another drop to eight-year lows this year on increased costs and a delay in resumption of shipments from Karnataka, source of around a quarter of India’s exports.

Tight Indian supplies and booming Chinese demand lifted spot iron ore prices to record highs above $190 a tonne in mid-February. They are currently trading near $176. The world’s fifth-largest steel producer, India is aiming to lift output to 120 million tonne by the end of 2012 from nearly 67 million tonne in 2010, as the likes of steel giants ArcelorMittal and Posco expand their reach into Asia’s third-largest economy.

India is looking at 8.2 per cent growth this fiscal year, after expanding 8.5 per cent last year, underscoring the need to boost domestic steel output and consumption of iron ore.

With expansion in its steel sector, the country’s iron ore exports are forecast to fall to roughly half of the 97.6 million tonne shipped in the last fiscal year by the year to March 2016, said Gunmeet Singh, analyst for CRU in Mumbai.

India’s traditional steel blast furnaces can use only iron ore lumps, but there is a growing move among steelmakers to invest in more pelletizing and sintering plants that can take the iron ore fines now mostly exported to China.

Singh estimates that the country’s pelletizing capacity will triple to 90 million tonne in five years and its sintering capacity will increase 55-60 per cent from 53 million tonne. Apart from imposing higher taxes to stop iron ore exports, India also hiked freight rates twice this year, making carriage costs for exports five times more expensive than those for ore for local consumption.

The increased taxes and tariffs pushed the average cost for Indian iron ore to $100 per tonne, more than double the production cost in Australia and Brazil. The higher cost slashed margins of producers, after taking out handling and shipping fees. Indian exports also suffered from a ban on shipments from the iron-ore rich state of Karnataka, source of around a quarter of the country’s annual exports, from July 2010, as part of state’s crackdown on illegal mining.

Gavin Montgomery, iron ore analyst at Wood Mackenzie, said he expects Indian shipments to fall to 65 million tonne by 2015, prompting big suppliers Australia and Brazil to sell more to China and non-traditional exporters to boost shipments. The burden of producing more to feed China’s demand rests on big suppliers Australia and Brazil.

Brazil’s Vale and Australia’s Rio Tinto and BHP Billiton, which together control around two-thirds of global seaborne supply, are looking to boost their collective output by half to around 1 billion tonne by 2015.

That will equal China’s import demand by then as high production costs and low-quality iron ore reserves boost its purchases, according to estimates from Wood Mackenzie.