The Indian government announced the construction of 100 smart cities and a couple of infrastructure projects in its fiscal year (or FY) 2014/15 (April 2014 to March 2015) budget, which will increase the steel demand in the country. India's steel consumption is expected to increase 5% from 79 million tonnes (or MT) in 2013 to 83 MT in 2014, while the production is expected to increase 3% from 81 MT in 2013 to 84 MT in 2014.
India's iron ore production has declined due to high export duty, land acquisition issues, delay in lease renewal, and mining ban in the states of Karnataka, Jharkhand, Odisha, and Goa. The Bellary-Hospet region in Karnataka, Jagdalpur district in Chattisgarh, Odisha, and Jharkhand have high-grade iron ore deposits, while Goa has low-grade deposits. The mining ban has affected operations of Vedanta Resources (OTCPK:VDNRF), as the company owns iron ore mines in Goa and Karnataka. In April 2014, the Supreme Court of India permitted iron ore mining in Goa with an annual cap of 20 MT.
Indian steel companies Steel Authority of India, Tata Steel, and Jindal Steel and Power have captive iron ore mines, while the remaining are waiting for the allotment of captive iron ore mines. ArcelorMittal (NYSE:MT) plans to scrap its 12 MT steel project in Odisha due to land acquisition issues. The company has started fencing its 6 MT steel project site in the Bellary district of Karnataka. However, the company doesn't have a captive iron ore mine, and is waiting for the auction process of 51 iron ore mines in Karnataka. POSCO (NYSE:PKX) is waiting for the formal handover of land and captive mines for its $12 billion, 12 MT greenfield plant project in Jagatsinghpur, Odisha. The project area has been reduced from 4,400 acres to 2,700 acres due to opposition by local villagers.
The recent iron ore mining ban in Odisha caused a price increase of $8.33 (INR 500) per tonne for both fines and lumps. The prices for fines and lumps touched $113.33 (INR 6800) per tonne and $41.67 (INR 2500) per tonne respectively. The royalty rates are expected to increase from 10% to 15%, which will increase the iron ore prices further.
In fiscal year (or FY) 2010/11 (April 2010 to March 2011), the production of iron ore was 207.16 MT, while its domestic consumption for steel making was 107.22 MT. In FY 2013/14 (April 2013 to March 2014), the iron ore production was 48 MT higher than the total consumption of 103.73 MT meant for steel making. India, once an iron ore exporter, may become a net importer of iron ore. Indian steel makers plan to expand aggregate capacity from 90 MT in FY 2012/13 (April 2012 to March 2013) to 114 MT in FY 2017/18 (April 2017 to March 2018), which will increase the demand for iron ore.
Australian miner Atlas Iron (OTCPK:AGODY) made its first shipment to India in May 2014, and the company is looking forward to increase its partnership ties with India. JSW Steel, India's third largest steel producer, plans to import 15 MT of iron ore from abroad. In April 2014, Tata Steel imported 45,000 tonnes of iron ore from Western Australia for testing purposes of its steel mills.
The state and central governments in India will have to take measures to resume iron ore mining. However, renewal of mining licenses and getting environment clearances is a long process which will take time. The global iron ore prices are below $100 per tonne. Thus, importing high-grade iron ore from Australia and Brazil to meet the demand-supply gap appears to be an ideal solution. This would be beneficial for Atlas Iron, BHP Billiton (NYSE:BHP), Vale (NYSE:VALE), Rio Tinto (NYSE:RIO), and Fortescue Metals Group (OTCQX:FSUGY), as they can supply high grade iron ore to India.
In my article, "The Outlook For The Indian Rupee", I have mentioned the likely risks for the Indian rupee. The iron ore imports would add to India's import bill. On the other hand, reduced iron ore supply will affect the steel industry output, which will also affect India's growth. Also, importing steel would turn out to be a costlier option.
I would conclude by saying that as India grows, its steel demand will also grow, which will increase demand for iron ore. The steps of the Indian government to regulate the mining industry will take time for implementation. Hence, it is likely that the Indian iron ore imports will rise in the future.
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