by K SUBRAMANIAN
THE iron ore mining industry in Karnataka grabbed headlines in 2008 when the State’s Lokayukta reported largescale illegal mining in Bellary, Chitradurga and Tumkur districts. This eventually forced the Supreme Court to intervene and suspend all mining and transportation operations. The ban was lifted in 2011 when the apex court ordered introduction of e-auction mechanism for iron ore in the State, with a ceiling of 30 million tonne per annum, to put an end to indiscriminate mining and ensure fair and transparent pricing.
Five years down the line, Karnataka’s iron ore mining industry is again in the news for wrong reasons. This time, there are allegations that the largest miner of iron ore in the State, government-owned NMDC Ltd, has been selling the mineral at a steep discount and causing a huge loss to the State and central government exchequers despite the introduction of auction mechanism.
For any auction process to arrive at an effective price discovery, a widely diverse seller and buyer base is a must. After all, the entire idea of conducting an auction is to let the market create various price points, depending on the demand and supply situation, and decide the price of any commodity. Such vibrant pricing mechanism ensures that neither the seller nor the buyer is put at a disadvantage. However, the e-auction process in Karnataka hasn’t led to similar results since the State has one dominant seller— NMDC—and one dominant buyer—JSW Steel, a very large steel producer. According to NGO, Samaj Parivarthana Samudaya, NMDC has been under pricing the iron ore that is sold through its two mining leases in Bellary district with a view to benefit a few private steel, pig iron and sponge iron industries in Karnataka.
The NGO, which had earlier played a crucial role in exposing illegal mining in the State, filed a writ petition in the Karnataka High Court in April on this issue. On the HC’s direction, the NGO has recently written a letter to the Union ministries of mining and steel for conducting an investigation into the under-valuing of iron ore price by NMDC from its Bellary mines between 2011 and 2015. With the State-owned miner doing this, the State government faces revenue loss in the form of royalty, cess, sales tax, 10 per cent contribution to Special Purpose Vehicle and contribution to District Mineral Fund.
Since the base price is fixed by NMDC, which is the dominant seller, it sets the benchmark for other iron ore miners in the State. Consequently, the revenue loss is significantly higher. According to the letter written by the NGO to the two central ministries, “The price gap between international import parity price and NMDC price is almost Rs. 2,000 per tonne. This implies NMDC could have priced its iron ore sales of 12 million tonne per annum from Karnataka at approximately Rs. 2,000 per tonne higher than current prices and, in turn, earning Rs. 2,400 crore per year in additional profits,” the letter says.
In last financial year, for example, NMDC produced 11.6 million tonne iron ore from its Karnataka mines. Of this, 9.66 million tonne was bought by JSW. While the import parity price of grade 62 iron ore was Rs. 4,688.20 per tonne for JSW, NMDC sold the same grade to the steel major at Rs. 3,007.80 per tonne in the last fiscal, thereby resulting in an average loss of Rs. 1,680 per tonne for the State-owned mining company. As per the NGO’s letter, the under pricing by NMDC has also led to an estimated loss ranging from Rs. 1,687-3,217 crore to the government’s exchequer in the financial year 2015-16.
While NMDC continues to follow the curious practice of selling iron ore at a discount, other government-owned miners like Hindustan Copper and NALCO fix the price of copper and aluminum in line with the prevailing international prices. Iron ore mining in Karnataka cannot be an exception to the rule and it is imperative that the auction price reflects the global price trend. It is, thus, high time the government stepped in and corrected this faulty policy to make pricing realistic and remunerative.
VOL. 10, ISSUE 3 | JUNE, 2016