The presentation explores the various strategic initiatives to be taken by Indian iron ore miners to survive the slowdown in iron ore demand, aggressive marketing by the world largest miner exporters from Australia and Brazil. The presentation calls for united effort from Indian iron ore miners/exporters to navigate the new scenario post global recession by suggesting strategies and action plan.
- 1. SUCCEEDING IN A CHANGED WORLD Strategic options for Indian
Iron Ore KK KUMAR VICE PRESIDENT M & L MSPL LIMITED , HOSPET,
INDIA. FIMI - IRON ORE SUMMIT- JUNE 8-9, 2009 SINGAPORE
2. GLOBAL DEVELOPMENTS From Boom to Gloom
- Financial crisis of US spreads to entire world
- Almost all developed countries facing recession
- Growth rates of emerging economies like China, India, Brazil
and Russia also slowed down
- No sector of the economy spared. Commodities, Shipping, Metals
worst affected.
- Severity and breadth of depression unprecedented in living
memory
- Thankfully, entire world united to shorten the duration of
downturn.
- Massive stimulus packages by all countries to revive
economies.
3. NEW REALITY FOR GLOBAL IRON ORE
- Global Iron ore market turned from Deficit to Surplus
- Consecutive 6 annual price hike trend broken
- Benchmark Prices fall by 30-40% forecasted
- Spot iron ore prices crash by over 60%
- Global steel production expected to contract by 10%
- Sharp increase in spot sales by Big 3 Competition in spot
market for the first time.
- As increasing volumes get pushed to spot market, new market of
hedging and swaps emerging
- Rules of the Game Rather - the GAME itself has changed
radically.
4. NEW REALITY FOR GLOBAL IRON ORE
- Massive surpluses of iron ore due to fall in global steel
demand
- Production cuts by Big 3 to production in line with demand
- Large steel production cuts by Japanese , US and European
countries.
- Except for China, severe contraction in steel production
thereby China emerging as the only country with large and growing
demand.
- Miners, who had hitherto lower share in Chinas iron ore market,
now targeting China as a major destination
- China is the only beacon of hope in these difficult times.
- Crash in ocean freights has reduced price differentials of iron
ore from different origins, increasing competition. (Current
differential between Brazil and Australia origins at USD 12/mt as
against over USD 60/mt in the past during boom period).
- Competition in the spot market for the first time as more and
more quantities are being sold by Brazil and Australia in the spot
market.
5. NEW REALITY FOR GLOBAL IRON ORE:CHINAS ECONOMY HAS BOUNCED
BACK IN Q1 2009 & TREND EXPECTED TO CONTINUE. 6. Trends in
Ocean Freight Rates 7. NEW REALITY FOR GLOBAL IRON ORE
- Small and medium steel mills which did not have access toterm
ore from Australia and Brazil now being wooed byGlobal Miners with
promises of future supplies under term pricing. India was the
largest supplier to this segment earlier.
- Lower offtake under term contracts in China and drying up of
markets in rest of the world, forcing Big 3 miners to ship
increasing quantities on CNF basis to China for spot sales.
- Ready inventory at ports and stocks of spot ores have resulted
in transfer of price risk to suppliers from buyers.
- Continued uncertainty of Long term price conclusion making spot
sale market stronger. Market slowly drifting towards price index;
swaps, hedges etc.
8. IMPACT ON INDIAN IRON ORE EXPORTS
- Indias dominant position in spot market is now threatened with
entry of global miners
- Loss of market share in spot market
- Ability to drive spot prices impaired. Price leadership
lost.
- Selling prices of Australia / Brazil acting as price ceiling
for Indian iron ore.
- With higher ocean freight Vs Australia, fob realizations for
below 64% Fe grades in India lower than Australia.( bulk of Indias
exports are in this segment).
- India now more vulnerable to ocean freight hikes because of its
dependence on Handy, Supra and Panamaxes which have alternate
markets like Grains/fertilizers/cement etc. as compared to Cape
size market which is dominated by iron ore / coal both of which are
in low demand globally.
9. IMPACT ON INDIAN IRON ORE EXPORTS
- Consequently, Indias fob realizations would continue be under
pressure
- Price monopoly of Indian railways / ports will reduce Indian
exporters head-room to manage costs, especially Logistics cost
which form over 65% of total costs.
- Lower international prices will thus reduce viability of Indian
iron ore exports.
- Absence of domestic market to absorb 100 million mt of exports
will make merchant miners unviable, threatening iron ore mining
sector itself.
10. SUCCEEDING IN A CHANGED WORLD Strategic options for Indian
Iron Ore 11. STRATEGIC OPTIONS FOR INDIA
- Over supplied China Market and low prices will continue
at-least till 2010.
- Cost cutting only means of staying afloat.
- Lobbying with railways / ports to cut freights/ tariffs which
form 65% of total costs. 200X class should go.
- Increasing efficiencies/ productivity
- Cut flab acquired in previous boom period
12. STRATEGIC OPTIONS FOR INDIA
- Period of crisis and challenge requires Cooperation among
Indian miners
- Unity a must for lobbying with Govt, Railways, Ports,
Transporters & Service providers
- Realize that China requires India as much as India requires
China. India, an effective hedge for China against global miners
oligopoly.
- Resist price cutting and undermining of Indian export
prices
- Share information on problem customers and eliminate
opportunistic elements.
13. STRATEGIC OPTIONS FOR INDIA
- China about advantages of Indian ore suppliers as
-
- Negotiation hedge against global miners
-
- Cost advantages of reaching non-cape ports and thus lower
inland logistics cost, small parcel size, lower finance costs,
short lead time, lower price risk etc.
-
- Wide product range Fe from 52% to 64%
- Indian Govt. on the contribution of Iron ore exports to balance
of trade with China and for Indias trade balance
- Central and State govt. about contribution to economy and
development of interior/remote areas, direct employment and
indirect support to livelihoods for policy on continued export
- Steel industry about feasibility of co-existence of export and
domestic markets
- Policy makers about the existing iron ore reserves and
un-explored potential
14. STRATEGIC OPTIONS FOR INDIA
- Evolve IRP Bands ( Indian Reference Price) for major Fe
grades
-
- Price Band to accommodate interests of diverse parties/specs as
opposed to single price. IRP to act as floor price to prevent price
cutting
- Identifying aneffective forum (counterpart of CCMC/CISA) and
for announcing IRP.
- Voluntary compliance to IRP will result in collective
good.
15. STRATEGIC OPTIONS FOR INDIA
- FIMI to sponsor China office IndORE Indian Ore
-
- IndORE will do generic marketing of Indian iron ore
-
- Interaction with small and medium steel mills in china
-
- Prepare market intelligence reports of market and chinese steel
companies for dissemination to Indian exporters
-
- Become a knowledge centre of Statistics and Data base creation
and maintenance
-
- Extend legal assistance to Indian exporters
-
- Conduct bilateral dialogue with CISA/CCCMC
16. STRATEGIC OPTIONS FOR INDIA
- # 6:CREATE NEW CONTRACTS:
- Indian exporters could create new model contracts for short
duration say 3 ~ 6 months with fixed price and volume to counter
price volatility and enable buyers to secure fixed ocean freight
with short duration COAs.
-
- Overcome price volatility
-
- Overcome risks associated with Long Term contracts
-
- Overcome Buyers resistance to fluctuating spot prices
17. STRATEGIC OPTIONS FOR INDIA
- # 7:CREATE NEW BUSINESS MODELS- 3 WAY
- The market segment for Indian iron ore is primarily small and
medium steel mills in China with no/inadequate access to long term
ore. All existing contracts are either between miners and traders
or between miners and steel mills.
- Traders perform an important function of finance, barter,
market knowledge, facilitation of exports, local knowledge etc. Due
to price volatility and risks, trader would prefer stable
relationship with buyer and seller. Thus, a 3 way contract between
steel company, Iron ore miners and Trader would enable fixed volume
sale with market prices; OR fixed volume-fixed price sale. Such
contracts by Indian sellers will accord stability to volumes.
18.