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India Steel and Mining
2015-Iron ore over supply- :Long term implications for
Indian steel and iron ore
• Potential iron ore over supply by 2015E: In a detailed report ‘Fortescue
Mining Group- Is there a danger of oversupplying the iron ore market?’ dated
March 25th, 2011, JPM Australia Resources analyst Mark Busuttil highlights
the risk of iron ore oversupply as the Big 3 + Fortescue (FMG) have very
large capacity addition plans. According to Mark, the cumulative planned
capacity addition by these companies (high grade, low operating costs of
$30/MT) over 2015-2020E (please see excerpts from the report in the attached
note) is 696MT by 2015 (2011E prod of 782MT) and another 475MT over
2015-2020. This is a medium to long term scenario. Our global view is that of
limited production growth from the major producers over the next 3-4 years and
delays to growth from mid-cap miners is likely to see pricing remain high for at
least the near-term.
• Implications for Indian steel and iron ore: Such large potential capacity
addition could push down iron ore prices globally and impact the cost curve of
the Indian steel industry. However, two most important (and difficult) variables,
are a) Chinese steel capacity and demand growth and b) Supply discipline in the
miners. Mapping the capacity build out, the planned capacity addition picks up
from CY14E. While some flattening of the steel cost curve for Indian steel
makers is likely and the captive iron ore advantages of TATA should
diminish from current levels (~$240/MT of steel), and non integrated cos
like JSW should benefit, we do not see a complete negation of TATA’s iron
ore advantage. Even at JPM 2014E iron ore price forecast of $98/MT
(CFR), which are 45% lower than current prices, TATA and other
integrated steel mills should still have an advantage of $110/MT.
Additionally continued elevated iron ore prices over the next 3-4 years, could
likely keep TATA’s India margins above its peers.
• What happens to the large iron ore export industry in India: India's iron ore
export industry is based on exports to China. While Goa has the lowest opex/MT
at <$35/MT, opex/MT to port from other regions like Karnataka (>$65/MT) and
Orissa is much higher because of inland transportation costs. However, Goa
grade of iron ore is significantly lower, and hence discount to high grade would
likely increase over time. It remains to be seen as to how the Indian iron ore
exporters over the next 3 years look to diversify from their core iron ore export
business (possibly through forward integration into steel making).
• This could change the investment priorities of steel companies: Indian steel
mills have historically looked to build steel plants in Eastern India, closer to
mines and have seen significant delays. As global low cost iron ore supplies
increase, we see more Indian steel mills coming up in non traditional areas like
Western and Southern India as land availability is easier and proximity to ports
could ease the iron ore dis-advantage. In the event the above global capacity
build were to pan out, we see lower probability of TATA going ahead with its
proposed investment in the Canada iron ore project.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Steel and Mining
2015-Iron ore over supply- :Long term implications for
Indian steel and iron ore
• Potential iron ore over supply by 2015E: In a detailed report ‘Fortescue
Mining Group- Is there a danger of oversupplying the iron ore market?’ dated
March 25th, 2011, JPM Australia Resources analyst Mark Busuttil highlights
the risk of iron ore oversupply as the Big 3 + Fortescue (FMG) have very
large capacity addition plans. According to Mark, the cumulative planned
capacity addition by these companies (high grade, low operating costs of
$30/MT) over 2015-2020E (please see excerpts from the report in the attached
note) is 696MT by 2015 (2011E prod of 782MT) and another 475MT over
2015-2020. This is a medium to long term scenario. Our global view is that of
limited production growth from the major producers over the next 3-4 years and
delays to growth from mid-cap miners is likely to see pricing remain high for at
least the near-term.
• Implications for Indian steel and iron ore: Such large potential capacity
addition could push down iron ore prices globally and impact the cost curve of
the Indian steel industry. However, two most important (and difficult) variables,
are a) Chinese steel capacity and demand growth and b) Supply discipline in the
miners. Mapping the capacity build out, the planned capacity addition picks up
from CY14E. While some flattening of the steel cost curve for Indian steel
makers is likely and the captive iron ore advantages of TATA should
diminish from current levels (~$240/MT of steel), and non integrated cos
like JSW should benefit, we do not see a complete negation of TATA’s iron
ore advantage. Even at JPM 2014E iron ore price forecast of $98/MT
(CFR), which are 45% lower than current prices, TATA and other
integrated steel mills should still have an advantage of $110/MT.
Additionally continued elevated iron ore prices over the next 3-4 years, could
likely keep TATA’s India margins above its peers.
• What happens to the large iron ore export industry in India: India's iron ore
export industry is based on exports to China. While Goa has the lowest opex/MT
at <$35/MT, opex/MT to port from other regions like Karnataka (>$65/MT) and
Orissa is much higher because of inland transportation costs. However, Goa
grade of iron ore is significantly lower, and hence discount to high grade would
likely increase over time. It remains to be seen as to how the Indian iron ore
exporters over the next 3 years look to diversify from their core iron ore export
business (possibly through forward integration into steel making).
• This could change the investment priorities of steel companies: Indian steel
mills have historically looked to build steel plants in Eastern India, closer to
mines and have seen significant delays. As global low cost iron ore supplies
increase, we see more Indian steel mills coming up in non traditional areas like
Western and Southern India as land availability is easier and proximity to ports
could ease the iron ore dis-advantage. In the event the above global capacity
build were to pan out, we see lower probability of TATA going ahead with its
proposed investment in the Canada iron ore project.
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