Kolkata | Jan 27, 2016: The world saw India embrace resource nationalism when, by way of slapping a very high export duty on iron ore, irrespective of whether it is lump or fine form and its iron content, it ensured major fall in the exports of the steel ingredient.

Not only did exports slide from a high of 127 million tonnes (mt) in 2011-12 to less than 5 mt in 2015 (January-December), ore production during this period went down from 227 mt to 128.90 mt.

This, however, does not provide any scope to rejoice at having attained the objective of conservation of a resource to be needed in growing quantities in the future by a rapidly expanding domestic steel industry.

As a 30 per cent duty smothered exports by outpricing Indian ore in a rapidly falling market, the court ordered stoppage of mining on a large scale because of the absence of environment and forest clearances. This has caused dislocation to the extent that the country last year became a net importer of the mineral: India's iron ore imports of 15 mt in 2015 exceeded exports by over 10 mt.

In a move which amounted to going back on its earlier commitment to allow duty-free export of iron ore pellets to encourage local agglomeration of fines not much in use in the country, the government put a 5 per cent levy on pellet exports on January 27, 2014.

The duty, described as "irrational" by industry officials, led capacity use to drop to as low as 30 per cent and closure of a number of export-oriented units. The virtual collapse of the industry finally led the government earlier this month to remove the duty on pellet exports.

Similarly, in order to ensure some presence in the world market, New Delhi in a belated move is charging a duty of 10 per cent on export of ore with iron content of up to 58 per cent. Ores richer in iron will continue to be charged 30 per cent duty.

But why should exports channelled through a public sector trading house invite a flat duty of 10 per cent in a blatant discrimination against private parties?

The world's leading producers of the mineral must be gloating over India's near disappearance as an exporter. Unfazed by the collapse of iron ore prices to a ten-year low of around $40 a tonne in the midst of the prolonged supply glut, Vale of Brazil and Anglo-Australian miners Rio Tinto and BHP are all doubling down on capacity expansion and increasing sea-borne ore supply.

As Vale is to complete expansion of the world's largest iron ore complex at Lajaras in Brazil later this year, both Rio and BHP are investing heavily to expand their network of mines and infrastructure in Australia's Pilbara region.

Not only are supplies rising from the big three, Hancock Prospecting, of which Australia's richest person Gina Rinehart is the chairperson, has begun shipments of iron ore from its 55-mt Roy Hill project, claiming an investment of $11 billion.

All these groups have their mines designed for highly cost efficient production, which will facilitate their riding out the commodity slump. For example, Rio, the industry's lowest cost producer, incurred cash costs of $16.20 a tonne in the first half of 2015. Therefore, even if the bearish forecast of Citigroup that ore prices could fall below $30 a tonne materialises, industry leaders would still remain in profits but with their margins squeezed.

Falling prices have forced closure of high cost mines in China and elsewhere. Otherwise, why should China lift imports of iron ore by 2.2 per cent to a record 952.72 mt in 2015 when its crude steel production was down 2.3 per cent to 803.83 mt?

If growing efficiency levels of leading miners are considered, then for them to consider production cuts would require ore prices to fall further. Investment banker Goldman Sachs agrees.

Less competitive
What do the recent developments in the global ore market mean for India, which earlier vacated space for over 120 mt of ore to miners in Australia and Brazil?

Local industry officials are worried that as a large number of mines, particularly in Odisha, remain shut following the Supreme Court order of May 16, 2014 and reopened mines in other parts of the country are only limping back to normal production, steel mills in the south will have reasons to strengthen their import dependence for security of ore supply.

Railway iron ore freight from east coast to the south being Rs 3,131.42 a tonne, imported ore is working out cheaper for steelmakers in Karnataka. In the comity of steel producing countries, India remains an exception where steel production and demand continue to rise at healthy rates. This makes India a natural target for global mining leaders who now have the benefit of low dry cargo shipping freight.

Mining groups here are minnows compared to the likes of Rio which lifted production of ore by 11 per cent to 327.6 mt in 2015. It will further raise output by about 7 per cent this year to 350 mt. In contrast, India's production last year was down 23.53 mt to 128.90 mt.

While the big foreign miners enjoy significant cost advantage because of their colossal operations and highly efficient logistics management, their Indian counterparts find their iron ore costs escalated by a host of levies such as royalty (at 15 per cent of average sale price) on ad valorem basis, and contribution to the District Mining Foundation (30 per cent of royalty) and the National Mineral Exploration Trust (2 per cent of royalty).

Therefore, the longer the large number of mines in Odisha, which has the biggest share of the country's iron ore production, remain in limbo the more foreign mineral will meet the growing demand.

Hopefully then, those non-functioning Odisha mines which have received all the statutory clearances will be allowed to resume production without further loss of time.

(Source: http://www.business-standard.com/)