Indian iron ore producers had two big policy-related grouses: a ban on exports from their Karnataka mines and stiff export duties levied in the Union Budget 2011-12.
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The Supreme Court has came to their rescue on one count, asking the state government to put in the requisite infrastructure to curb illegal mining and allow exports to resume from 20 April.
Some of the damage has already been done. Between end-July and now, China’s spot price for imported iron ore fines gained 40%. That is nearly eight months of lost export revenue in a period of sharply higher price realizations.
Adding insult to the injury is the recent hike in the export duty to 20% on iron ore fines from 5% earlier. That means for every Rs100 earned, compared with a net realization of Rs95 earlier, companies will get only Rs80 now. The export duty will continue to pinch, but the ban’s removal puts them in a better position.
Between April 2010 and February, the iron ore industry’s exports fell by about 18%, chiefly due to the ban in Karnataka. Volumes will rebound in fiscal 2012, but how prices will react to this development is important.
The ban was one reason for higher international iron ore prices, since it limited supply. Higher demand during the year was another reason, as global steel production revived. Since iron ore availability for exports will now increase, some impact on prices is to be expected.
Another cause for concern is slower growth in China’s steel production. The government’s attempt to moderate industrial growth appears to be working. Chinese steel companies are the main consumers of India’s iron ore. Any sustained slowdown in the steel production would affect demand for iron ore as well.
Sesa Goa Ltd’s share price rose 6.4% on Tuesday, as news of the Supreme Court decision reached the markets. Its production in the quarter ended December fell 21% from the corresponding period in the previous year, partly due to the Karnataka ban.
Though the overhang posed by higher export duty and a difficult policy environment for iron ore producers stays, the removal of the ban offers some hope for a better performance in fiscal 2012. Iron ore prices could play spoilsport, however.
Graphic by Paras Jain/Mint
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