Non-renewal of mining leases has put a strain on India’s iron ore users as the companies are starving for raw material.
A report in The Economic Times said the shortage had left companies such as Essar Steel and Jindal Steel & Power struggling as their capacity utilization has shrunk to less than 40%.
The report goes on to say that unless leases are renewed in a hurry, the continued shortage and under-utilization of capacity could pose a threat to the finances of sponge iron and pellet companies, putting their total investments, worth billions of dollars, at risk.
Miners and steel companies are worried. For example, Vedanta Group chief Anil Agarwal tweeted last week asking the government to hurry up with clearances for reopening iron ore mines in Goa. Goa’s mining companies handle 50% of India’s iron ore exports. Agarwal also asked the government to abolish the existing export duty on iron ore.
Agarwal has made his stand on ore exports from India clear on earlier occasions. He has often said it was ironic for India to be producing only 100 million tons a year even though it had the ability to produce 600 mt a year of iron ore.
Agarwal’s angst is understandable for the Vedanta Group company Sesa Sterlite, one of the largest ore mining companies in India based in Goa, was doing rather well on the export front before mining was banned about two years ago.
Even as the Goa government is about to bring in a new mining policy to reopen mines, the falling prices of iron ore in the global market and the export duty make it a very unattractive proposition for Sesa Sterlite to sell iron ore abroad.
The government is caught in a piquant situation – if it continues with the 30% export duty, miners cannot export the ore at high rates and would be forced to sell it locally, and if it removes the export duty, steel mills will be left to buy imported iron ore since the shortage would increase domestically as most of the ore would be exported.
The government of India seems to have decided to tread the middle path. It is now being said that the government was likely to introduce a “differential export duty” on iron ore. Under this, producers of low-grade raw material will have to pay low export duty rates, and according to this report the move would help the struggling miners of Goa.
If the proposal is, indeed, implemented, it would have the government charging different rates for exports of various grades of iron ore rather than the present uniform rate of 30%.
But it could be too late if you read a recent report in The New York Times. China is one of the biggest importers of Goan low-grade ore, but according to the NYT report, China was looking at Malaysian mines to get its own quota of cheap ore for profit reasons more than anything else. The report pointed out that the Chinese steel industry was reluctant to rely exclusively on Australia and Brazil for its ore supply.
The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.