India faces domestic iron ore supply challenges despite ample reserves

Degrading quality, challenges with auctions and high premiums on mines will act as a deterrent in securing domestic iron ore supplies for Indian steelmakers despite abundant reserves, participants said during a Sponge Iron Manufacturers Association conference held Jan. 16.

Global production of high-grade iron ore that is with an Fe content of over 62% has reduced from 60% to 40% in the last five years, and low-grade iron ore production has increased, causing supply constraints, said Pankaj Satija, executive vice president at JSW Group.

"1% decrease in Fe leads to a 1% increase in gangue material, and this requires more flux and has a cost distribution of 2%-2.5% in hot metal production," Satija said.

Top iron ore miners Rio Tinto and BHP have lowered their iron ore specifications over the past year due to a decline in quality.

Strong preference among Indian end-users for purchasing high-grade iron ore within the domestic market also drives up prices as they have limited availability and erodes any competitive advantage of sourcing higher-grade raw material, industry participants said.

Apart from quality, quantity also remains a key issue, as despite ample reserves of iron ore in India and the Indian government's regular mine auctions, participants said high premiums on mines have caused operational challenges.

Of the 152 iron ore mines India has auctioned since 2015, the average premium on the mine is 124%, Satija said, adding of the 44 mines that are operational, 21 are with integrated steel plants and have an average premium of 92.9%, while the other 23 are with merchant miners, with a premium of 136% making it unviable for merchant plants to run.

High premiums are bid by end-users and merchant miners to the government to secure mining rights, as the auctions are highly competitive.

"We are dependent on [coking] coal... it would be a real shame if we can't manage the iron ore reserves which are there in India... we should avoid a situation where we become import dependent," Tata Steel's Group Chief of Raw Material Procurement Amita Khurana said.

"With high premiums in these auctions, we're also outpricing ourselves. Ultimately, for a buyer like me, [we] will be looking at the arbitrage, which is available between domestic and imports. And over a period of time, if that gap keeps bridging, then there's an issue," Khurana said.

Tata Steel's lease on four of the six legacy iron ore mines, namely Joda East, Noamundi, Katamati, and Khondbond, will expire in 2030 following changes in mining regulations.

The steelmaker has been preparing to secure iron ore supplies for 2030 and beyond by bidding for new mines, and is expected to bid for the expiring mines once they come up in auction at the end of the decade.

Tata Steel has also recently booked a 20,000-mt iron ore lump ship from its Canadian subsidiary, Tata Steel Minerals Canada, to assess the cost-effectiveness of sourcing such shipments and testing to understand its potential impact on future steel production.

High premiums also lead to operators surrendering mines, and a lack of a timeline from the government regarding such reallocations causes delays in these mines being promptly offered in new auctions and hinders their timely resumption of production, industry participants said.

Platts, part of S&P Global Energy, assessed the Iron Ore Index, or IODEX, at $103.55/dry mt CFR North China Jan. 20, down 90 cents/dmt day over day.