1,00,000 tonnes of iron ore unsold in e-auction. Arbitrary pricing?

The steel industry had heaved a sigh of relief when on 2 September the Supreme Court ordered e-auction of 1.5 million tonne of iron ore per month out of the stocks lying in the mines. So it came as a surprise when the steel industry reeling under a scarcity of one of their crucial raw materials did not end up buying even 1 lakh tones of iron ore on the first day of e-auction on Wednesday.

[caption id=“attachment_85703” align=“alignleft” width=“380” caption=“The low grade iron ore cannot be used directly for steel manufacturing and has to go through a beneficiation process. Reuters”]  [/caption]

The Bangalore Chamber of Commerce and Industry (BCCI) says the exorbitant price of the low grade iron ore has kept out smaller players from bidding. In fact pricing has been done arbitrarily without any parity with the market price of low grade ore. Their release complains, “It is surprising to see no bidders for certain grades of iron ore with less than 60 percent iron (Fe) content in the e-auction in spite of acute shortage of Iron Ore and several steel companies are either closed down or running at significantly lower capacity.”

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The higher grades of iron ore saw better demand as the bigger players were ready to pay a premium on them.

The low grade iron ore cannot be used directly for steel manufacturing and has to go through a beneficiation process which causes losses to the ore. Therefore, for every 1 percent Fe, one pays a premium of $6 per tonne (around Rs 276). In a recent auction by NMDC through MSTC Ltd, this low grade ore was sold at Rs 1410 per million tonne. For every 6 percent difference in Fe content, there was a premium of Rs 1410 per mt over this price. So this means there was a $5.1 premium for every percentage fall in the grade.

In the latest auction, NMDC reduced this premium to less than a dollar ($0.57). This shows how exorbitantly it had priced its ore. BCCI says, “Upon evaluation it is noticeable that more that 75 percent premium on low grade iron ore is charged in comparison to that of NMDC.”

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JSW Steel, the major steel player that was hurt the most due to the mining bans by the Supreme Court in several districts of Karnataka, has secured 1,08,000 tonnes of iron ore which constitute 27 percent of total ore auctioned (more than 63 percent grade). They paid around Rs 3150 per tonne. Nomura says the price was more than they had expected and now the laned cost for each tonne of ore for JSW will be Rs 4000. Once the base price of lower grades is revised JSW might be able to bring down their cost of procurement to some extent.

At present, JSW Steel has 35,000 tonnes of iron ore per day. To meet its production guidance of 8.75 mt of crude steel for this year it needs to take its capacity utilization to 90 percent for which it needs 50,000 tonnes of ore. High costs of procurement and unavailability of coal to match the 90 percent utilisation means both their volumes and profits would suffer. CLSA is expecting operating profits to go down by Rs 690 per tonne. So CLSA maintains their rating of Underperform and puts a target price of Rs 550.

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