Traders and exporters feel the prices may come down by $10 to $150 per tonne by the end of this month

The Multi Commodity Exchange of India (MCX) has received permission from the commodity markets regulator, the Forward Markets Commission, to launch an iron ore futures contract in Mumbai.

India`s metal and energy exchange MCX has already commenced trading in iron ore futures. This is the country's first commodity exchange to launch the contract. MCX's iron ore contract is designed to be the true benchmark of the Indian iron ore fines export market.

Iron ore is one of the most important commodities in the world today with increased demand being witnessed from steel mills.

``The MCX iron ore futures contract will give all market participants an opportunity to hedge their price risks against the volatility of the physical market,'' MCX's managing director Lamon Rutten said.

India is the world's third-largest iron ore supplier and plays a significant role in the global iron ore industry.

India had an estimated annual production of around 226 million tonnes in 2009-10, according to data from the ministry of mines, government of India. It exports over 130 million tonnes of which a large portion account for exports of ore fines.

``MCX's iron ore futures contract will go a long way in creating a market-driven benchmark for the entire industry and also for those nations importing iron ore from India, mainly China, which is the world's largest importer,'' the official added.

Meanwhile, an official of Sesa Goa said that iron ore prices dropped by 10% between February and March. ``The percentage drop from mid February to mid March is between 10-15%, depending on the grades, where lower grades have got a bigger hit than the higher grades,'' said P K Mukherjee, managing director of Sesa Goa.

He added that demand had been robust for the past two-three years, especially from China, whose field demand is quite aggressive and strong.

However, iron ore prices in China have come down over the last few days following a slow down in demand due to the devastating earthquake in Japan, the world's second largest steel maker after China.

Meanwhile, India's union government increased export duty on iron ore fines four-fold to 20% in the budget proposal for 2011-12, in a bid to discourage exports and conserve the material for use by the steel makers within the country.

Iron ore spot prices in Orissa, a leading producer of the ore in the country, has slumped and may fall by at least 6% within the next two weeks because of the new export duty that comes into effect from April 1.

Currently better quality iron ore is priced at $160 per tonne at Paradeep port. Traders and exporters feel the prices may come down by $10 to $150 per tonne by the end of this month. After the announcement in the budget, iron ore shipment contracts have taken a hit, exporters said.

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Iron ore spot prices in Asia remained strong on Friday and looked set to hit $200 a tonne soon, buoyed by demand from top buyer China and fewer high-grade cargoes.

The rally that began at the start of the year lifted key price indexes to record levels on Thursday and traders say the momentum could extend to at least next week before the Chinese week-long Lunar New Year holiday starts.

Chinese New Year kicks off on Feb. 2.

"There's not much high-grade cargo available and that's the reason why prices are rising," said an iron ore trader in Singapore.

"And the Chinese have no option so the buying activity will continue until next week. If supply remains tight when they are back from holiday, prices will continue rising."

Iron ore supply has been tight, with fewer cargoes out of Brazil due to rainy weather and Indian exports hampered by logistical problems and a ban on shipments from its Karnataka state since July.

Brazil and India are the world's second- and third-largest exporters of the steelmaking material. Chinese imports from the two countries fell in 2010.

Rising prices of iron ore as well as coking coal, another ingredient in producing steel, after floods hit top supplier Australia have pushed up Shanghai rebar futures to a record level for a fourth time in a week, although volumes have steadily fallen from November.

The most active May rebar contract on the Shanghai Futures Exchange rose as high as 4,956 yuan a tonne, before closing at 4,950 yuan, up 0.7 percent.

SWAPS FALL

Indian ore with 63.5 percent iron content was being offered at $188-$190 a tonne, cost and freight delivered to China, on Friday, steady from the previous day, said Chinese consultancy Mysteel.

"My company has decided to save some material for selling after the (Chinese New Year) holiday and we have stopped offering now as we can't see any signals for prices to ease," said a Beijing-based iron ore trader.

"It seems prices will hit $200 per tonne soon."

The Platts 62 percent iron ore index hit a record of $186.50 a tonne on Thursday, while the Steel Index 62 percent benchmark .also touched a record of $185.40.

Global miners including Brazil's Vale , the world's biggest iron ore producer, use the Platts index to decide prices for quarterly contracts, which analysts say are likely to rise again in the second quarter after an estimated 7-8 percent hike in January-March.

But a sharp decline in forward swaps on Thursday suggested prices could ease in the near term.

The Singapore Exchange-cleared February contract dropped 1.9 percent to $177.38 a tonne and March fell 2.8 percent to $172.38.

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Global miner Rio Tinto (RIO.L) (RIO.AX) is to nearly triple its capital spending to $11 billion next year from about $4 billion in 2010, it said on Friday, as it seeks to boost iron ore output by more than 50 percent over five years.

A major focus for Rio is expanding its iron ore division, the group's most profitable, to help meet China's heavy appetite for the raw material to make steel amid buoyant prices. "We believe the first and best use of our strong cashflows and robust balance sheet is to invest in the excellent range of value-adding growth projects across Rio Tinto's product portfolio," Chief Executive Tom Albanese said in a statement ahead of giving a presentation to investors.

Rio, the world's second-biggest iron ore producer, posted a record first-half profit in August and about 70 percent came from iron ore sales.

On Oct. 18 Rio and BHP Billiton (BLT.L) (BHP.AX) scrapped plans to form the world's biggest iron ore joint venture after regulators opposed the plan.

Rio warned on Friday that weak copper output would continue into next year before recovering in 2012.

Copper output would fall 18 percent to 661,000 tonnes this year. "The effect of lower grades will continue in 2011 but rebound in 2012," it said.

In the third quarter Rio produced a record amount of iron ore, but copper output fell 19 percent.

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Despite being outbid by the world's largest steel company in its quest to acquire Vancouver's Baffinland Iron Ore Mines, private equity firm Energy & Minerals Group has yet to thrown in the towel, hinting Monday the fund is prepared to make a revised offer.

Nunavut Iron Ore Acquisition-the special subsidiary created by the fund specifically for the Baffinland bid-has extended its offer to purchase Baffinland at a price of Cdn 80-cents per share until 7 p.m. on December 2, 2010.

Last Friday the Ontario Securities Commission halted trading in any securities issued or to be issued under the Baffinland shareholder rights plan adopted in March 24, 2009. Nunavut Iron Ore had argued the rights plan blocked the right of Baffinland shareholders to decide for themselves whether to accept the Nunavut all-cash offer of C$247 million or ArcelorMittal's C$433 million all-cash bid.

Baffinland's largest shareholder, Resource Capital Funds, has already entered into a lock-up agreement with ArcelorMittal in which the fund will tender its 23% of Baffinland shares to the offer.

In a news release Monday, Nunavut Chairman Bruce Walter said "Nunavut Iron is gratified that the Commission agreed with our submissions and cease traded Baffinland's shareholders' rights plan. As a result, the rights plan will not stand as an impediment should we proceed with a revised offer to Baffinland's shareholders."

"Nunavut Iron is considering ArcelorMittal S.A.'s offer for Baffinland and the options available to Nunavut Iron with respect to its own offer," the company said.

The object of both companies' desires is the Mary River Property, which is believed to have a 20-year mine life and an average annual iron ore production of 18 million tonnes. The Nunavut-based property has 365 million tonnes of proven and probable reserves grading 64.7% iron and 52 million tonnes of measured and indicated resources grading 64.6% iron.

Baffinland said it has invested more than C$400 million in the property, located on Baffin Island.

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Vale plans to more than double production by 2015, prompting its board of directors to approve a US$24 billion capex budget for 2011, dedicated to sustaining existing operations, R&D, and project execution.

Next year's capex budget is a 125.1% increase over the US$10.66 billion invested in the last 12-month period ended on September 30, 2010.

Vale plans to bring 18 large projects on line between 2010 and 2012 at an estimated total price tag of US$26 billion. Approved projects include Carajás Additional 30 Mtpy, Conceiçao Itabritos, Vargem Grand Ibabiritos, Oman, Tubarão VIII, CLN 150, Salobo, Salobo II, Konkola North, Long Harbour, Totten, Moatize, Biofuels, Estreito and Karebbe.

Five projects are expected to be completed next year including nickel/copper project Totten, an old mine in Sudbury; copper project Salobo; coal project Moatiz; and power generation projects Estreito and Karebbe.

"While iron ore and nickel will remain as our largest operations, our investments will entail a significant expansion of fertilizers, copper and coal, thus fostering the consolidation of a diversified portfolio of world-class assets, composed of bulk materials, base metals and fertilizers," Vale said in a news release Thursday.

While planned iron ore production is 311 million metric tons for 2011, Vale has targeted 522 million metric tons of production by 2015. Nickel production will be increased from the 295,000 tonnes planned for 2011 to 381,000 tonnes by 2015.

Copper production will be increased from 332,000 tonnes anticipated next year to 691,000 tonnes in 2015. Coal production will rise substantially from 11.6 million tonnes in 2011 to 42 million tonnes in 2015.

Potash production will be more than quadrupled from 800,000 tonnes in 2011 to 3.4 million tonnes in 2015. Phosphate rock production will be nearly double from 6.4 million tonnes in 2011 to 12.7 million tonnes in 2015.

Vale plans to spend $15.3 billion or 63.8% of its capex budget in Brazil, along with $1.96 billion budgeted for Canada, $1.4 billion for Argentina, $1.13 billion for Guinea, $1.12 billion for Mozambique, $663 million for China, $436 million for Australia, $338 million for Indonesia, $306 million for Oman, $166 million for Malaysia, $163 million for Peru, $102 million for Columbia, $98 million for Liberia, and $93 million for Zambia among other countries.

Budgeted R&D expenditures in 2011 are US$681 million to finance global exploration, $236 million for natural gas exploration, $805 million for conceptual, pre-feasibility and feasibility studies, and $264 million to be invested in new processes, technological innovation and adaption. Mineral exploration programs are being implemented in 22 countries.

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Iron ore prices are poised to decline further this year following a 14% drop so far in the third quarter from the second quarter.

Prices are averaging $143 a tonne for the third quarter, vs. $167 a tonne in the second quarter, according to Metal Bulletin prices.

Last week, global mining giant Rio Tinto(RTP) told Australia Associated Press that iron ore prices are set to decline 13.3% during the fourth quarter. The company's iron ore division chief executive Sam Walsh foresees prices dipping to $127 a tonne, based on the average index price during the previous quarter.

The Steel Index, which tracks 62%-grade iron ore arriving at China's Tianjin port, expects prices to plunge by around 12% during the fourth quarter. Assuming the current average of $143, the prices could hover around the $125-a-tonne mark.

In a recent development, China Minmetals Corp. told Bloomberg that the China Iron & Steel Association is negotiating with iron ore producers to fix a monthly price for the raw material. However, the move from quarterly pricing to monthly pricing increases the prospect of Chinese steelmakers defaulting on contracts, Minmetals' Vice President Feng Guiquan was reported saying.

This year, Rio, BHP Billiton(BHP), and Vale SA(VALE), which together account for about 70% of global iron ore production, fixed iron ore prices on a quarterly basis instead of the annual pricing mechanism followed earlier.

The steel industry will benefit from lower iron ore prices as it reduces the cost of production. China's steel manufacturers stand to gain from the drop, as the country is the largest steelmaker and top consumer.

Sluggish demand forced nearly 40% of Chinese steelmakers to suspend production due to a 17% drop in steel prices and as the government attempted to cool the overheated property market. Looking forward to 2010, MEPS, an independent supplier of steel market information, forecasts China's steel production to grow 10% year over year to 627 million tonnes from 567.8 million tonnes.

China's iron ore imports for the first seven months ending July 2010 stood at 360 million tonnes, up 1.5% year over year. The country's iron ore imports could reach 650 million tonnes during 2010, according to Wu Wenzhang, an analyst from steelhome.cn.

The likely surge in iron ore imports is attributed to lower prices and reduced stockpiles. However, China's steel production has declined 8% from May to July this year. Production fell to a five-month low of 51.7 million tonnes in July, down 3.9% month on month but up 2.2% year over year.

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