India’s iron ore exports
It’s worse than selling family silver?

The Ministries of Mines and Steel are at loggerheads on the issue of restricting iron ore exports. So is the mining sector and the steel industry as well as the Centre and mineral-rich states. The Cabinet can at best hope to minimise differences, not please every section.

By Special Correspondent

The ongoing controversy over the government’s new National Mineral Policy (NMP) in general and the issue of exports of iron ore in particular, continues unabated. It can be argued that if the revised policy is implemented, it could result in a situation that would be worse than selling the proverbial ‘family silver’ for a pittance.

Although the draft of the new NMP (revising the policy formulated six years ago in 1993) was included in the agenda of the Cabinet Committee on Economic Affairs on at least three occasions, the policy has not yet been approved. Not only are there are sharp differences of opinion between the Ministry of Steel and the Ministry of Mines, the Chief Ministers of a group of four mineral rich states in eastern and central India, Orissa, Jharkhand, Madhya Pradesh and Chhattisgarh, have raised strong objections to the passage of the new policy suggesting that controls be imposed on iron ore exports. The Chief Ministers have been arguing that the new policy should grant states greater freedom to seek and obtain higher value addition for the minerals found in their respective states as a prerequisite for giving ore blocks to public, private and foreign companies.

The revised policy, based on the recommendations of the committee headed by Anwarul Hoda, Member, Planning Commission, that submitted its report in July 2006, has favoured unrestricted exports of iron ore with a review of the position after three years. The essence of the controversy can be summarized thus:

Iron ore producers in the country maintain that there is no shortage of iron ore for the domestic companies manufacturing iron and steel. They contend that a clamour claiming that there is an impending shortage of iron ore has been deliberately orchestrated by steel making companies to influence government policy so that restrictions are placed on exports of iron ore. This, in turn, would ensure that steel plants are able to obtain supplies of iron ore at artificially depressed prices. It is further argued that the intention of the iron and steel industry is to keep iron ore prices low because the cost of extraction of iron ore in captive mines owned by the steel plants is relatively higher.

Iron ore producers predictably want to increase their earnings. They say that if they get a higher price from domestic steel makers, they would certainly not be interested in exports. Therein lies the catch. (Incidentally, only the “surplus” output of iron ore, mainly iron ore fines, is meant to be exported.) The other dimension to the controversy relates to the eagerness with which foreign companies such as South Korea’s POSCO have drawn up plans to invest large sums of money in India for steel manufacturing provided, of course, they are allowed to export iron ore to their own countries.

As the Union government continues to struggle to evolve an export policy that would satisfy both the iron ore mining sector and the steel industry, many believe that the differences between the two industries are irreconciliable. What the government can, at best, achieve is to minimize the differences between the steel and the iron ore mining industries, not appease both.

A key point of contention is whether or not India’s reserves of iron ore supplies would last for a century or more. The Federation of Indian Mineral Industries (FIMI) argues that iron ore supplies will be plentiful for the next hundred years and longer as iron ore reserves have been growing without additional surveying for new deposits. In addition, new technologies of steel production have reduced – and will continue to reduce – the quantity of iron ore that is needed for manufacturing each tonne of steel. FIMI further contends that India is producing excess iron and since the country does not have the capacity to store the iron ore, this surplus is what is being exported.

The steel industry, led by the Steel Authority of India Limited (SAIL) and Tata Steel (formerly the Tata Iron & Steel Company or TISCO) disagrees vehemently with this point of view. It has sponsored the writing of hundreds of articles and reports that argue that the country’s supplies of iron ore will not last more than the next four decades given current projections of steel output and the expected demand for steel in India. The steel industry, therefore, advocates stoppage of exports of iron ore, especially exports of what is described as “high-quality, low-priced” iron ore to China. The mining industry, on the other hand, claims that the bulk of the iron ore exported out of India is of “low-grade” and of a quality that makes such ore “unusable” in India.

In a new turn to the controversy on the revised NMP, a group of Members of Parliament recently sent a memorandum to Prime Minister Manmohan Singh seeking immediate imposition of restrictions on mineral exports and introduction of “investment-friendly” measures. The group of MPs, led by P. S. Gadhavi, BJP MP from Kutch, Gujarat, has argued for strict regulation on iron ore exports that should be permitted only after the needs of domestic metal-based industries are fully met.

Further, the MPs have sought more powers to mineral-rich states to offer iron ore mining rights to companies that propose to set up steel making plants in their states. In its memorandum to the Prime Minister, while arguing for restrictions on iron ore exports, the group of MPs has suggested that exports of chrome and bauxite ores (that are used in the manufacture of alloy steel or stainless steel) should be permitted and its value addition should be done by companies located in countries where the cost of electricity is competitive – since the making of stainless steel is highly power-intensive.

The group of MPs has blamed the Union government for keeping the governments of mineral-rich states as well as industry associations in the dark while finalizing the revised policy. Among the policy changes suggested by the MPs in their memorandum to the PM, the following sentence is noteworthy: “A change in licensing policy is also required so that (the) reconnaissance permit [(that is) followed by (the grant of a) prospecting licence and then, the mineral lease] is only given to a mining company that proposes value addition.” The memorandum has also suggested “tough” measures like cancellation of licences if the concerned companies do not adhere to agreed timelines in their contractual obligations.

Exports of iron ore from India have been growing at an incredibly fast pace. In 2001-02, iron ore worth US $ 428 million was exported. This value more than doubled to $ 870 million the following year, followed by a one-third rise to $ 1.13 billion during 2003-04. In 2004-05, exports once again more than doubled to $ 2.63 billion and in the next year, the quantity as well as the value of exports went up by roughly 15 per cent. China’s share in total exports of iron ore from India has risen to nearly 80 per cent from about 50 per cent a couple of years ago, with Japan and Korea following at a distance (see Table 1).

During the current financial year, 2007-08, for the first time in the recent past, the quantity and value of India’s iron ore exports in US dollars are expected to fall by a proportion between 15 per cent and 20 per cent. Interestingly, the principal reasons for the fall in iron ore exports have nothing to do with the growing world demand for India’s iron ore. First, the dollar has weakened by around 15 per cent against the rupee over the last year resulting in a fall in export realization in US dollars. More significantly, a Reuters report of October 26 quoted Rahul Baldota, President, FIMI, saying that iron ore exports from India could fall by 15 per cent because of handling problems in the equipment at two major ports, one on the east coast (Paradip, Orissa) and one on the west coast (Mormagao, Goa).

According to the National Steel Policy (NSP) announced in November 2005, in order to support steel production of 110 million tonnes (mT) by 2019-20, at 100 per cent capacity utilization, the Indian steel industry would need 190 mT of iron ore against nearly 60 mT at present. The NSP says that the in-site reserves of relatively rich iron ore in India are 11.43 billion tonnes of haematite and 10.68 billion tonnes of magnetite ores. The NSP also states that in order to ensure availability of 190 mT of iron ore for domestic production of steel by 2019-20, the government would need to ensure investments in creating additional mining and beneficiation capacity to the extent of 200 mT that would be worth around Rs 20,000 crore (see Box 1).

The bulk of the exports to China comprise iron ore fines. Fines and concentrates, which have little use in India except as a negative environmental externality, make up nearly 90 per cent of total supplies of Indian iron ore. As investments are made into beneficiation, sintering and pelletisation to use these fines, the steel industry expects a deceleration in the growth in exports of iron ore. Exports have been estimated at around 100 mT by 2019-20. In terms of the future policy on iron ore exports, especially exports of high-grade lumps (accounting for a bit over 10 per cent of total exports), it is argued that such exports should be increasingly leveraged for imports of coking coal (required for steel-making which India does not possess in adequate quality and quantity) or for investments in India.

The NSP has argued that long-term export supply of iron ore should be confined to a maximum of five-year contracts and the duration of such contracts should be reviewed from time to time. It says that a judicious balance should be maintained between exports and domestic supply of iron ore. What is indeed “judicious” is the real crux of the controversy.

In 2004, China was the highest producer of iron ore in the world at 335.6 mT (with an average iron or Fe content of 28 per cent) followed by Brazil at 270.5 mT (Fe content 66 per cent) and Australia at 234.7 mT (Fe content 65 per cent). India was the fourth highest producer of iron ore in the world that year at 120.6 mT (Fe content 61 per cent). Brazil was the highest exporter of iron ore at 236.8 mT followed by Australia at 210.5 mT with India in the third position at 62.7 mT. That year, China was the highest importer of iron ore at 208.1 mT followed by Japan at 134.9 mT. China’s consumption of iron ore was the highest at 543.7 mT, followed by Japan with a consumption of 134.9 mT. India’s consumption stoodt at 59.0 mT. These rankings have not changed since.

According to official government estimates, India’s reserves of iron ore are currently in the region of 25 billion tonnes (the third highest in the world after Ukraine and Russia and followed by China and Australia). Out of these total reserves, around 14.6 billion tonnes is haematite and the remaining 10.6 billion tonnes is magnetite ore, the Indian Bureau of Mines estimated in December 2005 (see Table 2).

Of the 10.6 billion tonnes of magnetite ore, approximately 7 billion tonnes are located in Karnataka. Of this quantity, more than 6 billion tonnes are located in and around Kudremukh that is located in the ecologically sensitive Western Ghats and in national parks. In line with the Supreme Court judgment on Kudremukh Iron Ore Company Limited, none of these 6 billion tonnes of iron ore, or around a quarter of the total reserves of the country, is currently available for mining.

With respect to haematite ore, which is spread over states such as Orissa, Jharkhand, Chhattisgarh and Karnataka, there are bitter battles raging over the allotment of mining leases. Briefcases change hands with regularity. The government of India has to play an important role in ensuring that national interests are upheld without being seen to be encroaching on the autonomy of states on the one hand and without taking sides in the tussle between the steel producers (represented by the Indian Steel Alliance or ISA) and the mining lobby represented by FIMI, both of which espouse the interests of their respective constituents.

If one considers the main argument of the ISA, the country’s iron ore reserves should be exclusively earmarked for domestic steel making and -- here lies the rub – at highly deflated prices. How hollow this argument is can be gauged from the fact that in countries like Japan (which produces about 115 million tonnes of steel a year) and South Korea (which produces 48.5 mT of steel annually), there is not even a single tonne of iron ore!

Paradoxically, steel giants like POSCO of South Korea and Mittal Steel are not just pressurizing state governments in Orissa, Chattisgarh and Jharkhand to provide them captive supplies of iron ore, they are adding preconditions for making investments, namely, that they be allowed to export a part of the iron ore provided to them in captive mines.

Many of those who are saying that they will make new investments in steel making in the country, including the promoters of the Essar group, the Ruias, have at some point of time or the other defaulted on their repayment schedules with financial institutions and banks. These players are clamouring for captive iron ore mines on the ground that SAIL and TISCO had been allotted such mines in the past. Moreover, given the high international prices of iron ore currently prevailing, the newcomers claim the playing field is not level. Hence, they want iron ore from captive mines at concessional rates. The point to note here is simple: both TISCO and, much thereafter, SAIL had set up their plants many decades ago, in almost primeval times, if one can use such a phrase. These two companies were able to derive advantages as industry pioneers.

Most private promoters who set up steel plants thereafter knew very well that the world over, the very concept of captive mines was no longer valid. No mention was ever made in their detailed project reports that they would have access to captive iron ore resources and their business models assumed that raw materials would be purchased from external suppliers. After the international steel market became buoyant, steel bigwigs from different countries have been hovering around India not so much to produce steel at competitive prices but evidently to gain from the country’s reserves of quality iron ore.

To cite an instance, the Indian Iron & Steel Company (IISCO) under SAIL with its precious Chiria iron ore mines, was once offered to a now-world famous steel group. The offer did not receive a favourable response. Why? Because there was a glut in the world steel market at that juncture.
The position adopted by the country’s steel companies is hypocritical to say the least. In the past and even today, these companies periodically raise prices of finished products and claim this is on account of higher manufacturing costs. At the same time, these companies exert political pressure on public sector companies like the National Mineral Development Corporation (NMDC) to sell iron ore to them at rock bottom rates that are below world prices. After the report of the Ganesan Committee on policies of pricing and distributing iron ore produced by public sector undertakings was implemented, the balance sheet of NMDC dramatically improved. Whereas the company was earning profits varying between Rs 300 crore and Rs 500 crore a year, this amount shot up to Rs 3,500 crore not because there was a sharp increase in output but largely on account of NMDC rationalizing its pricing formula in keeping with international long-term prices of iron ore.
By increasing steel prices at periodic intervals, steel manufacturers contribute to across-the-board inflation since steel is used as a raw material in many industries. Thus, while consumers suffer, steel companies want sops in the form of duty drawback and iron ore at rates that are below world prices. There have been instances in the past when raw material supplies by NMDC have not been promptly paid for. The obvious question that arises then is whether steel companies should be given a free hand to raise prices ostensibly on the group that international prices have gone up. What is sauce for the goose is not sauce for the gander. Parity with world prices of ore is not acceptable but ensuring that domestic steel prices conform with international prices is all right. Not surprisingly, Indian steel producers are keen on restricting steel imports?

It is not as if only steel companies are to blame. Iron ore producers are not exactly a bunch of saints. Many FIMI members are traders who want to earn a quick buck. While there is a plethora of laws and regulations that are supposed to be enforced by public sector mining companies, illegal mining by the private sector is often winked at. A recent documentary produced by Maya Sharma on NDTV on illegal mining in the Bellary-Hospet area in Karnataka was an eye opener not only for the state government but for the Union government as well. The documentary clearly revealed that private mineowners flout a host of mining laws relating to preservation of the environment and labour welfare, among other regulations.

Some of the illegal practices include mining in somebody else’s leased area, mining without forest and environment clearances, under-declaring output to avoid payment of octroi and other taxes, loading higher than permissible quantities in trucks thereby damaging roads and employing children as labourers to work under inhuman conditions.

The other racket relates to the quality of the ore that is exported. A detailed perusal of the chemical composition of export samples at the port would reveal the dimensions of this malpractice aimed at evading payment of the export cess of Rs 300 per tonne of iron ore exported. The NDTV documentary shot in Karnataka represents only the tip of the iceberg. Such illegal practices are rampant in other states as well, including Orissa and Jharkhand.

A look through the list of names and organizations that have either been allotted iron ore mines or those who have applied for mining leases, would be revealing. One will certainly find in this list the names of ministers, their kith and kin, former bureaucrats, their relatives and even, an ‘IAS Officers’ Club’ in Bhubaneshwar! Things have degenerated to such levels that there is apparently nobody to check the credentials of people and organizations that wish to explore the country’s mineral wealth, wealth which belongs to the people of the country as a whole.

Returning to the big picture, the Steel Ministry has a laudable objective of increasing steel production to a level of approximately 150 million tonnes a year by 2015 for which 240 million tonnes of iron ore will be required, based on a thumb-rule requirement of 1.6 million tonnes of iron ore per one million tonne of hot metal. Using this thumb-rule, India’s current reserves of iron ore will serve around 100 years. How come then POSCO wanted iron ore reserves for captive mining to the extent of 600 million tonnes? What is the calculation? Is the ore not meant for exports?
In the world steel industry, there are two different scenarios as far as consolidation is concerned. The Arcelor-Mittal and the Tata-Corus mergers have taken place in the steel sector while BHP-Billiton and Rio Tinto have consolidated operations in the mineral resources sector. Why can India not attempt similar consolidation initiatives in the steel and mineral sectors? Why should the government not create a mining authority/commission along the lines of SAIL or the former Oil & Natural Gas Commission (ONGC) that would become a large supplier of minerals at competitive prices while remaining conscious of ecological considerations and keeping in mind overall national interests? At the same time, NMDC can function on its current brief and make investments for beneficiation of low-grade iron ore.

In this day and age of economic liberalization, there are strong lobbies at work who wish to undermine the importance of the public sector in the steel and mining industries. In the process, private companies are being sought to be awarded lucrative mining leases through questionable means on the plea that these firms would add substantial value to the country’s mineral wealth. This trend needs to be curbed. Otherwise, SAIL could lose IISCO’s Chiria mines. Talks are already under way to give many of SAIL’s mines to private companies on the ground that India’s biggest public sector steel making corporation does not require the reserves of iron ore it has in its captive mines. A section of the top management is SAIL is understood to be working with individuals close to Union Steel Minister Ram Vilas Paswan in this nefarious exercise that has begun. NMDC has already lost two of its prized deposits in Bailadila: Bailadila 1 & 2 to TISCO and Bailadila 3 to Essar without the public sector company going through a transparent public process of competitive bidding.

There is one final reason why India’s non-renewable natural resources should not be given to the private sector on a platter. When the going was bad, during the BJP-led NDA regime, steel companies like Essar, Jindal and Ispat obtained substantial financial benefits from the government. Now that the steel industry is doing rather well, will the private steel companies compensate the exchequer? The fortunes of the steel industry in India and everywhere else are cyclical. A question worth pondering upon: will those Indian and foreign corporations that are today desperately hankering after supplies of iron ore lose their interest in steel making when the wheel of fortune turns?

(The author is an expert on the steel industry who chooses to remain anonymous.)