By Bizodisha Bureau, Bhubaneswar, July 18, 2019: Iron ore prices in the country are likely to go up by 15-20 per cent in the next fiscal after iron ore mining leases of merchant mines expire by March 31, 2020.

About 70 per cent of the steel makers, integrated or non-integrated, have no captive mines and are totally dependent on supplies from merchant miners. By March 2020, more than 30 iron ore mining leases, all held by merchant or non-captive lessees, are scheduled to expire

In FY19, the country produced 207 million tonnes of iron ore, 65-70 per cent of which was supplied by the merchant miners, according to a report by CRISIL. Odisha alone produced 114 million tonnes of iron ore, accounting for over a half of the country’s output. But the leases that expire by the end of March next year account for 50-55 per cent share of Odisha’s iron ore production and 10 per cent of the output in other states. The lapsing of validity of such mines could shrink 30 per cent in overall production of the ore, officials said.

The CRISIL report provides three scenarios after the validity of merchant mines expires. The base case assumes that auctions would be organized in a phased manner from Q3 of next fiscal with leases largely being opened up for merchant miners. “This case stems from two facts. First, the vintage factor given that these mines have been previously owned by merchant miners since more than a decade and secondly that the entire ecosystem of secondary steel-making in the eastern region feeds from these mines. Around 40-45 per cent of Odisha’s merchant iron ore production is consumed within the state and the rest is outbound to other states”, the report noted.

In this scenario, the supply disruption will be limited as the auction process will be staggered. “While the rise in iron ore prices will depend largely on the auction premium, under the base case, we believe the premium will be more rational, keeping the long-term landed prices in mind. This shall translate into a price hike of 15-20 per cent in FY 2021 over the current fiscal”, the report added.

In the last fiscal, domestic iron ore prices were half of the landed prices. This offered comfort to merchant miners. Also, merchant miners making profits of 35-40 per cent leaves room for a 15-20 per cent hike.

The other possibility is extension of validity of merchant mining leases by three years, ruling out any supply disruption of iron ore. Moreover, prices of iron ore are likely to soften given the inventory build-up and the prospects of global prices mellowing after peaking at five-year highs.

In the event of iron ore crunch, the non-integrated steel players will suffer. In this fiscal, the landed price for a non-integrated steel company on the eastern coast is estimated at Rs 3600-3700 per tonne.