Consumers pay price of futures trading ban

India’s iron ore business faces a major challenge. It is a challenge for survival. While a significant part of the iron ore produced in the country are mined for captive consumption and another is tied up contractually with the domestic steel mills, the bulk of the business remains in the hands of the merchant players who have so far prospered through their global business. India exported more iron ore than it sold domestically for many years now and the bulk of the exports are carried out by the merchant iron ore miners in the private sector.
Today, it is clear, exports from India will drop sharplydue to low demand from China and higher costs.
The rise of the iron ore export business was driven by the ability to quickly raise production from the mines held by the private players which had more reserves than estimated previously when the world scrambled for it . They grabbed the opportunities , emanating almost exclusively from the massive hunger for iron ore fines from China.
The Indian miners found a very good strategic balance in their product mix : they could sell the lumps in the local market at a hefty price and export the fines. They were blessed by the high ocean freight costs which left an attractive premium to be tapped on account of the freight differential derived over shipments from Brazil when they were to export to China.
Today, with the increased supplies from Australia, as the Chinese mills invested in Australian iron ore mines, and the vastly reduced freight differential ( only about $8 per tonne of iron ore now compared to over $50 at the peak ), the pricing power of the Indian iron ore exporters has dropped to nothing. Iron ore fines are getting exported at one third of the price that prevailed at the peak last year. Despite lack of economies of scale and backward technology in global comparison, the costs of mining iron ore remains comparable to the most efficient in the world, thanks to the low labour costs.
But to export, the iron ore, in most cases, especially in Orissa, has to be moved a long distance and at a fairly high cost. Inadequate railway infrastructure and high railway freight have forced the miners to move ores by road and the costs in doing so have been massive. Internal...





Neha Verma
PGDM 3rd sem