Pellet prices to correct by 30% from the pre-export duty levels; likely to impact players’ contribution margins by Rs. 1,000 per MT: ICRA
The Government of India smashed a hefty 45 percent levy (from nil) on the export of iron ore pellets from May 21, 2022. The application of this high export tariff has reduced a merchant exporter's net effective realization, causing pellet exports unviable. According to the most recent ICRA analysis of this sector, the steep drop in the effective free on board (FoB) price shall result in a supply overhang in the domestic market. This, in turn, would put pressure on the domestic prices, which are envisioned to correct by 30 percent in the near term. Consequently, the contribution margins of merchant pellet players are expected to decline roughly by Rs. 1,000 per MT (metric tonne) from pre-duty levels.
The imposition of a steep 45 percent export duty would render pellet exports unviable at current prices which is likely to impact players’ contribution margins by Rs. 1,000 per MT. The disruption in global seaborne supplies from India and Ukraine could, however, spurt seaborne pellet prices and subdue the pain of merchant pellet producers to some extent.
Commenting on the industry trend, Mr. Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA said “India exported more than 11 million tonnes (mt) of pellets in FY2022, accounting for almost 15 percent of its overall pellet production. With exports becoming unviable, industry asset utilization will be adversely impacted and domestic pellet prices would come under pressure, going forward. Our calculations suggest a 10 percent drop in domestic pellet production in FY2023 as the domestic market is going through a period of muted demand growth and is unlikely to fully absorb the pellet supplies meant for the export market.”
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The decline in pellet exports would also impact the iron ore demand and exert pressure on prices as close to 40 percent of the iron ore fines produced in FY2022 were consumed in pellet production. Prices of iron ore fines have already been corrected by more than 35 percent from the pre-duty level till June 22, 2022. While this is a positive development for the pellet players, the steep fall in domestic pellet prices would nevertheless condense their gross contribution levels.
Elaborating on this, Mr. Roy said “The spread between iron ore and pellet prices is a key determinant of a pellet players’ profitability. The spread stood at 5,000 per MT in May 2022 (pre-duty), almost 30 percent higher than the 10-year median spreads of around Rs. 3,900 per MT. The sharp decline in pellet prices in the current year, as anticipated, is likely to contract this spread to below the through-the-cycle median level for the first time in two years.”
A possible rebound in seaborne pellet prices, following the severe shortage of pellets in the export market, could, however, provide some respite to the domestic merchant pellet players. Ukraine, which is the second-largest pellet exporter in the world after Brazil, had stopped its supplies following the conflict with Russia. Ukraine’s pellet exports dropped to nil in the months of February and March 2022 against 3.1 mt in the same period last year. India and Ukraine together accounted for close to 20 percent of total seaborne trade in FY2022. Supply-side shocks from these two countries are expected to result in a major disruption in global pellet trade. This could support seaborne pellet prices, going forward, and part-alleviate the pain of domestic merchant pellet plants.