INDIA’S beleaguered iron ore mining industry is lurching towards yet another crisis. After being battered with production cap, environment-related clampdowns, labyrinth of taxes and duties and export restrictions, the threat of a price ceiling for domestic iron ore producers looms large. Reason: the government wants to ensure cheaper iron ore supplies to steel manufacturers “reeling” under high material costs to rein in prices of finished steel products.
According to reports, the government is currently working on a policy initiative to provide iron ore at a cheaper price and is likely to come out with details in a month. This essentially means that miners could either see introduction of price caps for specific grades of iron ore consumed by Indian steel companies, or there could be a cap on prices across grades along with restrictions on exports.
In October 2016, Niti Aayog had pushed the case for a new and dynamic steel policy. The report said, “seeing the current situation of the steel sector, it may be unlikely to achieve the targets envisaged in the National Steel Policy 2012, i.e. a capacity of 300 MT and production of 275 MT by 2025.” The report also advocated independent regulators for both steel and mining sectors besides highlighting the need for keeping a check on supplies and price of iron ore. The Steel Ministry has now taken a leaf out of Niti Aayog’s views and has mandated the government’s premier policy think-tank to devise formulations to reduce iron ore prices.
However, iron ore producers are not amused. They are of the view that when steel prices are market-determined, why put an artificial lid on iron ore prices? Further, the steel industry also receives protection from cheaper imports with anti-dumping duties on various steel products.
Iron ore prices (62 per cent FE content) collapsed from a high of $150 per metric tonne in January 2013 to $40 per metric tonne by December 2015 as steel industry in China slowed down but miners from Brazil and Australia did not bring down global supplies. The price drop was sharper for lower grades of iron ore. It is only in four months to January 2017 that prices have stabilised around $80 per metric tonne. However, they are still nearly 50 per cent off from their peak in January 2013.
There is also little respite for Indian miners as far as exports are concerned. According to Federation of Indian Mineral Industries, India’s exports slumped from a peak of 117 million tonnes in 2009-2010 to 4.5 million tonnes last year. Shipments have climbed to 14.8 million tonnes in the eight months to November, but this is minuscule given that the global sea-borne market is about 1.4 billion tonnes. Moreover, there is a fierce price battle between Indian and Australian miners that has led to steep discounts, especially in the low grade market. For ore with iron content below 58 per cent, Indian miners have been forced to give discounts of as much as 40 per cent to compete with Australian ores, which are being offered at a 25 per cent discount for similar grades.
“Why are we being singled out if the government thinks that steel prices need to be controlled so that they do not end up stoking inflation in the manufacturing sector? If the government wants lower steel prices, it should subsidise both steel producers as well as miners. We cannot have a situation in a free economy where raw material suppliers are forced to squeeze their margins while steel makers continue to rake in profits,” said the head of a Karnataka-based iron ore mining company.
“Indian steel producers are already provided with large amount of safeguards in terms of minimum import price, import duty, safeguard duty and anti-dumping duty. On the other hand, Indian iron ore miners are severely crippled with high royalty, various State-level taxes, high export duty, export restrictions and cap on production. Any further restriction and regulation of iron ore pricing will adversely impact the survival of the mining industry,” said the head of a Goa-based mining company.
The cost plus approach, which is being suggested for pricing domestic iron ore, is practised nowhere in the world. If implemented, it will discourage investment in mining technology, impact job creation and increase the negative impression about Indian mining industry in the international mining community. This, in turn, is bound to dampen India’s prospect of attracting FDI in mining.
Iron ore miners say iron ore only plays a small role in overall production cost of steel. Small steel manufacturers, for instance, follow blast furnace route where iron ore is responsible for only 18 per cent of the total cost. In the case of sponge iron producers, iron ore accounts for only 20 per cent of the overall cost.
Hence, the impact of price movement of iron ore in the overall cost structure of steel mills is minimal. Further, since sponge iron producers primarily prefer lumps, the lumps price of country’s largest producer NMDC is almost 50 per cent cheaper than comparable imported lumps prices.
WHILE it seems iron ore industry is being made a scapegoat, the real culprit behind rising steel prices is the spurt in price of coking coal. Since early 2016, coking coal price has increased from $83/t CNF India to $320/t—a jump of 284 per cent. As nearly 0.8 tonne of coking coal is required to produce 1 tonne of pig iron, this steep surge alone has increased the cost of production by nearly Rs. 12,700/t. The problem is aggravated by 2.5 per cent import duty imposed on coking coal along with Rs. 400 per tonne Clean Energy Cess. Further, in states like Goa, pig iron ore producers have to pay Goa Rural Improvement and Welfare Cess at Rs. 50 per tonne and Goa Green Cess at Rs. 375 per tonne for coal transportation. All these together come to around Rs. 70 per tonne in Karnataka and other States and Rs. 1,300 per tonne in Goa.
The iron ore industry currently faces plethora of taxes like royalty, Forest Development Fee, District Mineral Foundation, Pradhan Mantri Khanij Kshetra Kalyan Yojana, and Goa Permanent Fund. These taxes, some of which are duplicate in nature, are specific to the mining industry and are levied over and above normal taxes like income tax, service tax, excise and VAT. This heavy over-taxing accounts for more than 50 per cent of the sales realisation and distorts pricing in the industry. The current practice of auction of iron ore is also hampering blending and impacting requirement of small steel manufacturers and concept of mineral conservation.
The government should also reduce railway freight charges on transportation of low grade iron ore. The sponge iron units based in the Raipur/Raigarh hub of Chhattisgarh are at a distance of 400-500 km from iron ore mining belt of Odisha, while the distance from NMDC’s mines in Chhattisgarh is 800-900 km. The transportation cost by rail for these distances is as high as Rs. 1,200-1,800 per tonne. Similarly, iron ore transportation cost from Karnataka to pig iron ore producers in Goa or Maharashtra is Rs. 1,000-1,200 per tonne.
These steps will bring actual relief to steel producers and encourage them to utilise the low grade ore. This will also help mining become a sustainable business and promote India as a global mining hub.
– by K SUBRAMANIAM