China and emerging markets are seeing higher demand growth, according to ArcelorMittal. China is a key market for Indian iron ore producers because it absorbs nearly all the ore the country can export. A sharp uptake in Chinese steel production in 2009, with crude steel production up by 13% compared with an 8% decline in global output, has led to higher demand for iron ore.

Though India’s output growth was relatively low at 2.8%, the industry has recovered, and in December, output grew by 7%.

Graphic: Yogesh Kumar / Mint

Iron ore producers have been able to hike prices mainly due to the sharp increase in demand from the Chinese steel industry. The situation has led to improving margins. But it has also attracted unwanted attention. Even as Indian steel makers are hiking output, having to pay higher prices for iron ore is affecting their margins. Successful lobbying by the steel industry led to a 10% export duty on iron ore lumps and a 5% duty on iron ore fines in December.

Sesa Goa’s sales, for example, rose by 36% to Rs1,866 crore while its operating profit rose by 85% to Rs1,035 crore. Now, just one month of export duty amounted to about Rs18 crore during the quarter and the full impact will be felt in subsequent quarters.

Sharply higher iron ore prices from a year ago will mean that margins will continue to improve year-on-year, even if they lose some shine on a sequential basis. But if the government hikes export duties to 20%, then it will really begin to pinch margins.

However, higher output will drive performance, with Sesa Goa’s output up by 36% in the December quarter. The company’s capacity is projected to increase from 16 million tonnes (mt) to 25 mt in 2010 and eventually reach 50 mt by 2013.

In the short term, changes in duties could play some havoc with its earnings estimates, reflecting also in its share price. Higher output from its mines and an improving demand outlook for the steel industry are longer term positives.

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