Mumbai: India’s iron ore industry, spooked by government talk of higher royalty payments that threaten to drive up costs, may face a tougher challenge still — a bigger export tax if prices or exports start to rise.
A larger tax would inevitably tighten the Chinese market, particularly after India replaced Brazil as the No. 2 iron ore exporter to China, which is looking to step up imports this year to make up for decreasing domesticoutput.
Falling Indian sales would also present a good opportunity for Australianand Brazilian miners.
If prices rise, India would boost the tax, which now stands at 5% on iron ore lumps, and zero on the powdery fines with less iron, in its bid to encourage domestic production of steel. The tax could trim exports by a tenth, one analyst said.
India, along with China, is among the few countries boosting output of the construction material as it seeks to support economic recovery by reining in steel prices that have already started rising, fuelling inflation.
But with iron ore prices standing at $56 to $58 a tonne, off their peak of $145 in April-May 2008 amid falling demand from key consumers pinched by global economic turmoil, Indian exporters fear the new measure could damage them irreparably.
“We are struggling with higher freight costs and poor infrastructure at ports,” said Gaurav Atha, managing partner at K.N. Ram Co, a mid-sized miner based in mineral-rich eastern India. “And at this time of economic contraction, any tax would make the trade uncompetitive.”
ndian iron ore exports rose a marginal 1.4% to just under 106 million tonnes in the financial year to March 2009.
But a fall in prices this year on the back of lower steel demand has hurt many producers, forcing some of the country’s roughly 250 iron ore mines to cut production or even close down, industry sources say.
For the foreign market, where China is the dominant consumer, a bigger export tax would constrict iron ore supplies from India, with some smaller mines even shutting shop if margins were unacceptably squeezed.
“There is just no justification for a tax,” said H.C. Daga, president of Essel Mining Industries Ltd, a large miner and exporter based in eastern India. “The industry situation will deteriorate further.”
But it is unlikely the government would want to choke off exports, because annual production of 200 million tonnes of ores is not entirely consumed locally, said an analyst who asked not to be named.
“At the most, the 100 million tonnes of exports could come down to 90 million tonnes or so,” the analyst said.
Analysts say a mix of practical and ideological reasons would drive the Indian government to curb iron ore exports once prices of the raw material begin to rise, in turn driving up prices of steel.
Expensive steel would be a nightmare for India in its push to develop infrastructure and stoke economic growth while other major economies are grappling with recession.
The government’s action would be driven by its belief that India’s ores are a national resource needed to feed its ambitious expansion of steel capacity. India produced 52 million tonnes of steel in 2008/09 and plans to increase capacity to 124 million tonnes by 2011/12.
“The idea behind curbing exports of iron ore is to control prices, plus preserve the resource for domestic steel makers,” said Pawan Burde, a senior analyst at Angel Broking, adding that the higher royalties and taxes were designed to achieve the agenda of reining in exports.
But the government would wait to take its cue from the prices of the raw materials, another analyst said.
Tax Likely For Higher Grades
If prices of either steel or iron ore rise, the government could raise the export tax to make more ore available at home and limit prices, Sanjeev Panda, an analyst at Karvy Stock Broking Ltd., said. “It would look at iron ore in the second stage. First it would protect steel with a higher import duty,” he added.
India now imposes a tax of 5% on steel imports, which domestic industry would like to see go up to 20%.
Iron ore miners are already worried by the prospect of higher costs from government plans to boost royalty rates.
Mines minister B.K. Handique said on Monday he planned to make market prices the basis of the royalties miners pay to the government, rather than the current scheme of prices fixed by the government.
Analysts and miners said chances are the government could revert to a tax of 15% levied in June last year, though it might set lower rates for low grades. “If at all there is a revision, it could be on 65 grades,” said Glen Kalvampara, secretary of the Goa Mineral Ore Exporters’ Association,referring to ore grades that contain 65% iron.
“As far as fines are concerned, steel companies in India don’t prefer them.” Although the western state of Goa exports less than half of India’s iron ore, it is favoured by Chinese traders who like its low-grade ores.