The Hindu Business Line : Iron ore duty cut: Chinese demand more critical

Export duty on iron ore has once again been changed, but the relief from this move may only be marginal for domestic iron ore exporters. In end October, the 15 per cent ad valorem duty on iron ore fines was changed to a specific duty of Rs 200 a tonne; this has now been tweaked again to reinstate a lower 8 per cent ad valorem duty. The lowered duty may help Indian iron ore exporters price their products more competitively in a scenario where export demand for iron ore has been in a slump due to a cutback in imports by China and falling freight rates.

Demand critical

However, the unfolding demand scenario from China may be far more critical to volumes for Indian iron ore exporters than duty changes, at this juncture. Iron ore exports from India have slumped by 19 per cent during April-October 2008, due to the global recession.

Reports suggest that new infrastructure projects in China have slowed dramatically after the Olympics, reducing Chinese ore imports. The sharp correction in freight rates has also whittled down Indian exporters’ freight advantages over those from Australia and Brazil. With China and Australia investing in their own iron ore mines, further doubts have been created about the global demand prospects for iron ore.

The slowdown has taken its toll on the key user – the steel sector, as well, with steel mills operating at lower capacity utilization.

Will stimulus work?

The spot prices for iron ore in India have fallen below the contract prices for the first time in four years, indicating the state of things to come. In the above context, prospects for iron ore prices now hinge mainly in the stimulus package announced by China and its impact on China’s steel consumption and production.

China has now unveiled a $586 billion plan on infrastructure spending to revive its slowing economy. This has boosted hopes that China may reduce its internal commodity stockpiles and boost consumption, making up at least partially for a slowdown in demand from the developed world.

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