Iron ore defies the odds

 

Proving forecasters wrong, iron ore prices made

marked advances in 2016, though not as much as

metallurgical coal. In an interview with Kunal

Bose of DCI, Vedanta Resources CEO Tom

Albanese says the size of global ore inventories at

well above historical average, universal concern

over climate change and supplies from new mines,

particularly in Brazil and Australia will have a

bearing on price behaviour in 2017. Albanese says many

brokerages don’t see a runaway rally happening in iron ore this

year.

Q: Iron ore defied price forecasts by major research groups to

register sharp price rises in 2016. Metallurgical Mines Association of

China says average seaborne iron ore price in 2017 will rise

moderately to over $60 a tonne. What is your price forecast?

A: On the demand side, steel production was moderately up

driven by Chinese stimulus. The most important factor was on

supply side like we saw with price increases last year in metals.

There had been contraction of high-cost Chinese iron ore

production despite last year’s dramatic price increases. On the

seaborne ore supply, production was ramping up in Brazil and

Australia but at a muted pace. Finally, surges in coking coal

prices put a large value-in-use premium on higher index grades

of iron ore. Lower grades like what we export from Goa in

India are not, however, seeing any marked rises in prices.

 

Q: How do you look at liberalization of Indian exploration policy and

new mines ownership coming through auction bidding?

A: New Delhi is enthusiastic about boosting the sector through reforms. The amendment to the Mines and

Minerals (Development and Regulation) Act that

allows transfer of captive mining leases not

granted through auction will boost natural

resources sector in the medium to long term.

Mergers and acquisitions in sectors that rely on

natural resources will benefit from the

amendment to the Act.

However, some legacy issues such as land ownership pattern,

quality of mineralization studies, small sizes of deposits put on

auction and end use restrictions are weighing heavily on the

mining sector. These need to be addressed. A pro-reforms

government in New Delhi and India’s ascending global stature

conjures up image of Australia during the 1970s, when the

natural resources industry was nascent in that continent. Today

that industry in Australia offers the best-in-class infrastructure

and use of low emission technologies. I believe India has the

means and the will to come Australia’s level quickly.

What further gives me confidence is New Delhi’s

reinvigorated hydrocarbons policy that encourages greater

private sector participation. As the regulatory system matures

and awareness spreads across communities and carbon neutral

technologies are introduced, the natural resources sector will

continue to evolve robustly with high levels of contribution to

the country’s GDP.

 

Q: The Indian iron ore industry had been through much tumult in

recent years with court-ordered mines closures. The rules of the game

then got changed because of the amendment to MMDR Act in 2015.

 

What will be your prescription to restore normal mines operation?

A: Prior to the ban, India was one of the world’s largest

exporters of ore. That coincided with a booming commodities

sector, with China principally driving global demand. But last

year beginning the world faced headwinds such as fears of a

China slowdown, sluggish economic recovery in the West,

concerns over growth sustainability in emerging markets and

surplus iron ore supply. In any case for over a year, the market

entertained fears of lower world metal demand on the back of

China entering a mature period in its materials consumption

cycle.

But the fear sentiment that this generated disappeared when

Beijing introduced a stimulus programme in the second half of

2016. Liquidity flowed into infrastructure and real estate

sectors. In the process ore demand was reignited. Donald

Trump winning the US Presidential election convinced

commodity bulls of a rally in 2017.

As for India production caps have led to a fraction of the

quantum being produced before the ban. For example, a cap of

20mt (million tonnes) a year in Goa falls way short of

production that can be sustainably mined there. Our suggestion

to the government is to lift the cap gradually and introduce

checks and balances to ensure sustainable mining.

 

Q: But will not the bulls have to contend with global high inventories

of ore and commissioning of new large mines?

A: True, ore inventories are rising and these are at this point well

above historical average. Given this situation, a legitimate

question is to what further extent can spot prices climb. Then,

global concern over climate change will be an interesting factor

to watch out for. Some softening of ore prices of late is

ascribed to Beijing asking steel mills to stay shut till the smog

has cleared. The Chinese steel sector stuck with old

technologies has higher emission levels than its peers in many

other countries. Are we going to see Chinese industry making

mass transition to a new environment friendly technology or will

Beijing rest content introducing a stricter regime for steel mill

operation? Answers to these questions as they unravel will

decide the course of ore prices.

 

Q: What could be the impact of price improvement on ore output?

A: That there is a trickle-down effect of higher prices on ore

production is accepted. In the past couple of years the focus of

miners was to improve operational efficiency and cut costs to

weather low prices. This might now change to more action on

ore price improvement and demand supply outlook being less

overcast. Brazilian Vale’s $14.3 billion Eliezer Batista S11D

complex near Canaa dos Carajas in Brazil stands as an example

of how greenfield and brownfield activities in iron ore industry

may kick off. Miners in general are cautiously optimistic about

how ore prices will play out this year. While some brokerages

expect prices to average $60 a tonne, there are others who

dismiss the recent rally as a “fluke”. In any case they don’t see a

runaway rally happening in 2017.

 

Q: Aluminium is doing well with LME three-month price quoting over

$1,790 a tonne. Alumina prices too are up in tandem. How do you

see aluminium performing in 2017 and beyond? Where do you see

Indian aluminium capacity by 2030? Should India take alumina

abroad for smelting where power comes cheap?

A: Demand for aluminium has continued to be strong over the

past several years, as new applications are found for this

important metal. However, this demand growth has been more

than met by very rapid smelter capacity expansion in China in

particular. This has kept the white silvery metal in surplus, with

low prices. Hopefully capacity growth is moderating in China,

helped by rising coal and alumina costs. Another factor that has

reduced the stockpile is the price and availability of alumina.

Aluminium may see an upside in 2017 to factor in the rising cost

of raw materials. Increasing input prices such as that of caustic

soda will have a critical bearing on aluminium prices. Any

increase in green energy cess will add up to aluminium

manufacturing cost.

Alumina smelting in India is relatively expensive due to higher

cost of power and freight. However, to move smelting offshore

may not be rewarding, if one considers long-term dynamics.

Favourable trade policy such as increasing customs duty and

placing minimum import price on aluminium shall be

instrumental in protecting Indian producers of the metal. With

New Delhi promoting the natural resources sector,

attractiveness of alumina production in the country will grow.

The average per capita consumption of aluminium in India is

2.2kg against a global average of 8kg. That is a pointer to the

huge potential for aluminium consumption growth in the

country. With India remaining the fastest-growing major

economy in the world, aluminium use can only rise. India has

vast reserves of bauxite and that will prove handy in future

smelting capacity growth.

Q: Zinc has been one of the best-performing base metals in 2016.

Will this again be the case in the current year?

Q: In a rising base metals price environment in 2016, Zinc led

the way with a gain of over 70%. Zinc has a multiplicity of

industrial applications and its demand is linked to global

industrial production and GDP growth. Considering that China,

India and now Brazil are chugging along at a fair speed, the

demand for zinc will remain steady. If the US infrastructure

ramp up moves forward according to Trump’s plan, that would

give extra fillip to zinc prices.

But what has clearly come out of zinc’s track record over the

years is that supply will decide prices to a large extent. A

number of large zinc mines closed during 2015/16 as reserves

were exhausted or operational costs became too high. It will be

hard to replace this lost production.

Most analysts are predicting strong zinc prices for 2017.

There is a chance for significant further price improvements.

This may, however, be self-defeating as it could become a catalyst

for new supply. This may make any such rally short-lived.

 

Q: What exactly has triggered the turnaround in commodities —

minerals and metals — when the IMF has cut global growth forecast

by 0.1 percentage point to 3.4%? The IMF says the Brexit vote

implies a substantial increase in economic, political, and institutional

uncertainty, which is projected to have negative macroeconomic

consequences, especially in advanced European economies. Your

comments.

A: Yes, global GDP estimates have been recently tempered

downward. But at the same time the US and China will both

see synchronized growth for the next few years. This is to

happen for the first time in over a decade. While the UK and

EU economies may suffer some uncertainty, it won’t be enough

to significantly reduce overall global metals demand. The main

story for metals will happen on supply side. After years of

sharply reduced capital spending, surpluses are turning to deficits

and metal inventories are beginning to fall. It will be hard to

reverse this macro sector-trend.