India Losing Iron Ore Market as Courts Shut Mines
Ambar Timblo has no work. For the first time in six decades his family’s iron ore mines in India’s western state of Goa are idle. A court-imposed ban on production drove away his biggest buyers in China and Japan.
“It will take me a decade to win back market share as there is tremendous uncertainty about supplies from India,” said Timblo, a London School of Economics graduate and a former national badminton player. “Our loss has been a gain for our rivals from other countries.”
Fomento Resources Pvt., set up by Timblo’s grandfather in 1957 when Goa was a Portuguese colony, is among companies that together own 93 mines that were shut in the state after a probe found that mining had contaminated ground water and led to illegal logging.
The ban is the second by India’s Supreme Court following one in 2011 in southern Karnataka state that began eroding the nation’s credibility as a supplier, shoring up prices for the ore and handing additional sales opportunities to companies such as Rio Tinto Group Plc (RIO) and BHP Billiton Ltd (BHP), Australia’s two biggest iron ore exporters to China.
“The drop in supplies from India has tightened the market and provides support to iron ore prices,” said David Radclyffe, managing director of equity research at Nomura Holdings Inc. in London. “Because of uncertainties in India, low-cost miners like Rio are clearly finding a bigger market share.”
The spot iron ore price at China’s Tianjin port climbed 67 percent to $144.90 a ton as of Dec. 31 after dropping to a three-year low in early-September.
Shares of BHP Billiton rose 2 percent to A$37.84, the highest in 11 months, at the close in Sydney today, while Rio climbed 2.4 percent to A$67.62, its best price in 10 months. Fortescue Metals Group, Australia’s third-biggest exporter of the ore, jumped 5.8 percent to A$4.92, its highest level in more than five months.
Australia supplied 318 million tons, or 47 percent of China’s imports in the first 11 months of last year, up from 43 percent in 2011 and about 35 percent in 2007. India exported 33.1 million tons in the first 11 months, for a 4.9 percent market share, down from 11 percent in 2011 and 21 percent in 2007, according to data compiled by Bloomberg.
Rio Tinto spokesman David Luff declined to comment on its sales or the drop in output from India. BHP Billiton spokeswoman Fiona Hadley said the company wouldn’t comment on sales to a specific region.
“Indian supplies are often unstable with the export bans imposed by the government,” said Chen Shuangye, an iron ore purchase manager at Shanxi Jincheng Steel Holding Group Co., a steelmaker in China’s northern province of Shanxi. “We bought a lot from India in 2008-2009, now we use Australian and Brazilian supplies instead.”
The shortage hit several steelmakers. JSW Steel Ltd. (JSTL), India’s third-biggest producer of the metal, cut output to 30 percent of capacity at its biggest plant in 2011. It has since increased production to 70 percent after the court allowed auctions of stockpiled ore. Tata Steel Ltd. (TATA) and Steel Authority of India Ltd. (SAIL), the nation’s two biggest producers, have their own iron ore mines.
JSW’s profit in the year ended March 31 was the lowest since fiscal 2009, which saw the fall of Lehman Brothers Holdings Inc. and a worldwide economic crisis that lead to a slump in commodity prices. With improved ore supplies and the low base of 2012, this year’s profit is forecast to jump three- fold.
The travails of Timblo, Fomento’s 36-year-old managing director, reflect the political climate in India where a series of corruption scandals have rocked Prime Minister Manmohan Singh’s government.
That has prompted the judiciary to take on a more activist role, according to Rajiv Kumar, the former head of the Federation of Indian Chambers of Commerce and Industry. In February, the Supreme Court stripped phone operators, including the local venture of Telenor ASA (TEL), of 122 licenses following a state auditor’s report that said the government may have lost $31 billion after allocating airwaves without an auction.
“We are seeing a rise in judicial activism in India because the government’s regulatory oversight is compromised and the industry does not adopt any initiative for self- regulation,” said Kumar, now an independent economist. “We have to find the right balance between growth and sustainable industrial practices.”
Investigations by the Justice M.B. Shah Commission of Inquiry, appointed by the federal mines ministry, said companies in Goa exported about 350 billion rupees ($6.4 billion) of illegally mined ore. The companies, including Vedanta Resources Plc (VED) unit Sesa Goa Ltd. (SESA), deny the charges. They say mining accounts for about 25 percent of the state’s economy, the most of any industry including tourism, and employs 90,000 people.
Claude Alvares, director at Goa Foundation, a group of environment activists who sought the ban, declined to comment as the matter is in court.
The Supreme Court, which began hearing the Goa government’s plea to lift the ban on Dec. 7, will likely resume proceedings at the end of January. The case may drag on for more than a year, as did a similar one in adjacent Karnataka state, Timblo said.
As supplies from India fall, China’s demand continues to grow. The country’s iron ore imports, estimated at 718 million tons in 2012, may climb to 770 million tons this year, said Hu Yanping, chief analyst with researcher Custeel.com.
The Shah Commission is now broadening its probe, surveying mines in Odisha, where a concerned state government has stopped issuing transport permits for mines that produce ore for trading, H.C. Daga, group executive president at Essel Mining & Industries Ltd., said in a phone interview. That has led to mines stopping work and supply shortages for steel mills, Daga said.
Karnataka and Goa, two of the three biggest iron ore producers in India, accounted for 37 percent of the country’s peak output of 218.6 million metric tons in the year ended March 2010. Production fell to 169.7 million tons last fiscal, the lowest in six years.
The bans are forcing India, which has enough iron ore reserves to meet its needs for at least four decades, to import the material.
Imports may reach a record 5 million tons in 2012 as companies such as JSW Steel and Essar Steel Ltd. seek supplies, said Gunjan Aggarwal, senior consultant at commodity research firm CRU Group.
Sesa Goa, India’s largest exporter of the ore, is considering imports to keep its pig iron plant in Goa running, Managing Director Prasun Kumar Mukherjee said. The company’s iron ore operations in Goa and Karnataka are shut.
Meanwhile, Timblo’s only hope rests with the government of Goa’s representation before the Supreme Court to argue the miners’ case. The state may lose 40 billion rupees in revenue this fiscal year because of the halt, the Indo-Asian News Service cited Chief Minister Manohar Parrikar as saying on Dec. 13.
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