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Commodity Profile – Iron Ore |
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Iron Ore is the world’s second-largest commodity market by value after crude oil. Iron (Fe) is a mined product; a commodity used as principle raw material for making steel. Iron ore exists in mainly two forms i.e. Hematite and Magnetite. Hematite ore - Fe2O3 - (also known as ‘natural ore’) contains 66% of iron and could be fed directly to iron making blast furnace. |
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IMPORTANCE AND USES |
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About 98% of iron ore is used to make steel. |
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Powdered Iron is used in metallurgy products, magnets, high-frequency cores, auto parts, catalyst. |
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Radioactive iron (iron 59) is used in medicine, tracer element in biochemical and metallurgical research |
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Iron blue is used in paints, printing inks, plastics, cosmetics (eye shadow), artist colors, laundry blue, paper dyeing, fertilizer ingredient, baked enamel finishes for autos and appliances, industrial finishes. |
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WORLD SCENARIO |
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Stimulated by increase in world steel production, world iron ore production which exceeded 1 billion mark in 2003, reached 1.6 billion tons in 2009.
Output increased mainly in four major producing countries- Brazil, Australia, China & India. World seaborne Iron Ore Trade increased by 11% in 2009 to 895 million tons and expected to increase by 10% in 2010. China’s Iron Ore import was 628 million tons – 70% of seaborne trade. |
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Global – Production/ Consumption/ Trade |
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China imported a little over 66% of the global import of iron ore in 2009.
Japan and European Union import close to about 150 million tons annually, while South Korea imports about a third of it. Total global imports were 940.7 million tons in 2009. |
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China imported a little over 66% of the global import of iron ore in 2009.
Japan and European Union import close to about 150 million tons annually, while South Korea imports about a third of it. Total global imports were 940.7 million tons in 2009. |
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DOMESTIC SCENARIO |
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| Currently Indian Resources of Iron ore are 25 Billion Tons (6% of Global), ranked 5th - High quality reserves. India is 4th largest producing country and 3rd largest exporting country. 217 Million ton production and 117 Million ton exports in 2009-10. China is the largest recipient of Indian exports of Iron-Ore. |
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Source: U.S. Geological Survey, Mineral Commodity Summaries
Major States producing Iron-Ore(2009) |
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| India’s mine production grew at CAGR of 16.79% from 2004-2009. |
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Tata Steel and SAIL mine iron for captive purposes. |
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NMDC and Sesa Goa are the two large listed mining companies that sell ore. |
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Private companies (estimated around 100 -125) contribute close to 125 million tons of mine production of iron ore. These small units are exposed to price risks. |
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| PRICING MECHANISM |
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Since 2006, the price volatility has increased significantly in the spot market. |
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Annual ‘Benchmark prices’ have started losing their relevance. |
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Beginning 2010, annual prices were replaced by Quarterly price fixing. |
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| Daily Price Volatility |
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World over, swaps are gaining in popularity among producers as well as consumers. |
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In a swap deal, basically a bilateral contract, variable pricing is swapped with a fixed pricing. |
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Counter-party risks are high in a swap, transaction costs also are high. |
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Exchange traded futures is a very sound alternative to deal with price volatility |
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| WHY FUTURES CONTRACT |
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Exchange facilitates transparent price discovery and liquidity. |
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Exchange guaranteed contracts have lower transaction costs. |
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For the iron ore exporters, selling price is delinked from costs as rules of price fixing in the international market are different. Hence, price risk management is a must for securing a stable and predictable profit margin. |
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| FACTOR AFFECTING IRON ORE PRICES |
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Grades of Iron Ore |
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Export Demand for iron ore |
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Steel industry growth |
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Sea Freight rates |
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Govt. Regulations (EXIM and Mining) |
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Big Players(Big -Trio) Decision in Pricing Mechanism |
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Growth of BRICI |
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 Contract Qualification |
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Leaflet - Iron Ore |