By Melissa Pistilli - Exclusive to Iron Investing News

^[1]On March 14 this year, the Government of India-owned mining firm National Mineral Development Corporation ^[2] (NMDC) had issued a call for global partners to buy overseas mines. Mining giant Rio Tinto ^[3], also actively seeking to expand its iron ore resources, answered the call and both are set to ink an alliance deal on Monday next to acquire iron-ore assets in India and abroad.

Rio, the world's third largest miner, and NMDC, India's largest mineral miner, are "planning to look jointly for virgin assets," said NMDC Chairman Rana Som ^[4]. Established in 1958, the NMDC is one of India's largest government-owned enterprises and has been trying to establish a global presence and boost its mineral reserves for sometime. Currently, the company, responsible for 15 per cent of India's total iron ore production, is pursuing expansion in Australia and Brazil. The deal with Rio Tinto will help move the plan forward.

"It is a beginning. We have sowed  the seed, now one has to wait and see if it grows into a tree. We are hopeful of getting to the next level through the Rio Tinto deal," said Som. In reference to the financial side of the deal, the equity structure of the iron ore venture will depend on the assets acquired, reported the Indian Express. After announcement of the agreement, NMDC's shares rose more than 3.3 per cent.

The agreement will allow NMDC to prospect outside India with Rio's help. The alliance is also beneficial to Rio, who has had its sights on the world's fifth largest iron-ore reserves. Rio and NMDC's expansion plans have no doubt been prompted by the fourfold gain in iron ore prices since 2001, in large part due to the increasing demand from China. Currently, India's roughly 90 million tonnes of iron exports ^[5] head mainly to China. Most of India's sales are completed on spot basis unlike long-term contract arrangements made by other big global suppliers.

India's Steel Price Moratorium Extended

At present,  India's steel industry ^[6] is facing the same pressures on its margins experienced globally as prices for raw materials increase in the global market. Over the last few months, iron ore prices have increased by 85 per cent and coking coal by 300 per cent. India's annual production ^[6] of over 53 million tonnes of steel accounts for only 4 per cent of global production, and it consumes 59 million tonnes, annually. Early last year, the Indian government enacted an export duty on iron ore of $7 per tonne on higher grades and $1 on lower grades in order to discourage exports and conserve iron supplies for India's steel makers so that they may expand production. 

In May this year, in an attempt to curb soaring inflation, the government persuaded steel manufacturers to keep their prices steady. "Since the contribution of steel and steel products to inflation has been quite high in the past few months, prices should be maintained at the current level," said Steel Secretary PK Rastogi ^[7]. The companies cut steel prices by almost $94/tonne and promised to hold these prices for three months.

Even though the moratorium ended last week, India's steel companies have not increased prices because international steel prices have dropped almost 5-10 per cent in the last few weeks. The government has asked the companies to extend the moratorium on steel price hikes, and this move is "testing the patience of steel majors" because holding prices will no doubt hit companies' profit margins. JSW Steel Managing Director and Assocham President Sajjan Jindal ^[7] said, "Our profit margins would get hit by almost 10 per cent, which in turn would impede our long-term expansion plans."

India's steel manufacturers have recently expressed intentions to raise prices 5 per cent. Currently, the gap between domestic and international steel prices is about 38 per cent. The prices will surely be set according to iron ore and coking coal prices. Over the years, India has fallen behind its Asian neighbours, according to Tata Steel Chief Ratan Tata ^[6], to keep pace with investment in infrastructure. It is important that Indian steel manufactures expand their production and increase their position in the global market. According to Tata, India was "uniquely positioned to become a self-sufficient and low-cost steel manufacturing nation" and meet the demands of the developing world.