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

# 1: CUT COSTS

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

# 2 :CO-OPERATE

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

# 3 :CONVICE

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%

• Reliable partner

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

# 4: CREATIVITY

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

# 5: CHINA PRESENCE

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:

SHORT TERM AGREEMENTS.:

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.

The advantages would be

• 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

CONTRACTS

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.

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