High iron ore prices to pressure Indian mill profits

Domestic iron ore prices in India may rise sharply in the 2020-21 fiscal year starting 1 April, said credit rating agency Fitch's Indian arm India Ratings, as mine auctions in Odisha state yield high-priced winning bids that could curb recovery in the profit margins of steel mills.

An average winning bid in the auction, which is nearing completion, entailed a commitment to pay the state government 100pc of the average monthly sales price of iron ore in Odisha for the 20-year lease period. Average monthly sales price data is published by the state-run Indian Bureau of Mines.

While some of the higher payout cost may be absorbed by the mining companies, most of it will be passed on to buyers. The 24 mines being auctioned off to new lease holders produced 60mn t of iron ore in 2018-19.

Demand for steel will increase marginally by 5pc in 2020-21 from an expected 4pc in 2019-20, said India Ratings. Slowing economic activity will slow the rebound in steel demand with the slim possibility of a significant pick-up.

Steel profit margins are expected to remain modest in 2020-21 but off lows during October-December 2019. Operating margins fell by 35pc from a year earlier during October-December. Margins are expected to bottom out in the January-March 2020 quarter, said India Ratings.

Steel prices in India may track global falls in 2020-21, if China's steel output remains at a high level amid slower construction activity.

If steel demand does not recover by the second half of 2020-21, the start-up of new production capacity and rising output at some recently acquired bankrupt Indian mills, such as Bhushan Steel and JSW Steel, could put pressure on margins by boosting supplies.

JSW aims to start up 5mn t/yr of additional capacity at its Dolvi plant, while it is also on the verge of acquiring the bankrupt 5mn t/yr Bhushan Power & Steel. State-controlled NMDC has set a July 2020 deadline for starting its 3mn t/yr steel plant in central India. Tata Steel expects to boost output at its acquisition Bhushan Steel, a sister company of Bhushan Power & Steel, to 5mn t/yr in 2020-21 compared with 3mn t/yr in early 2019.

By Prasenjit Bhattacharya

source: Argus Media