The Hindu Business Line : Indian exporters can still hit pay-dirt

Given China's growing demand for iron ore and India's proximity to China, there is enormous potential for Indian exporters to exploit this market. Since the average FOB price of iron ore with an Fe content of 62 per cent comes to around $40 per tonne, Indian exporters can easily absorb the duty hike.

The imposition of duty on Indian iron ore exports, at Rs 300 a tonne, in the budget has evoked mixed reactions. While the steel industry has welcomed the impost on the grounds that it will check the export of a fast depleting natural resource and allow Indian steel industry to become competitive globally, the Eastern Zone Mining Association has stated that the imposition will result in a drastic fall in exports and the Indian iron ore will become costlier than those from Brazil and Australia.

Sea-borne trade in iron ore

On the supply side, Australia and Brazil dominate the sea-borne iron ore trade, accounting for 63 per cent of iron ore exports in 2004 and this figure is rising. Production costs, as presented in the AME report (2005), in Australia, Brazil and India are around $9.80, $7.40 and $12 a tonne respectively. Sea-borne transportation of ore from Australia and Brazil to the major markets of Western Europe and Asia often adds $10-20 per tonne to the cost. The demand for sea-borne ore and to a lesser extent thermal and coking coal have seen freight rates for large bulk carriers reach record levels.

The overall effect of this increase in freight costs was the quadrupling of the historical differential between Australian and Brazilian ores to Asia, which has resulted in an unsustainable difference between Australia and Brazilin the cost of delivering ore. While the increased freight rates would add an additional $16 per tonne to the cost of supplying ore from Western Australia to China, an addition of $34 per tonne would be the cost of supplying ore from Brazil to China.

This indicates that while Brazilian producers achieve lower mine production costs ($7.40 per tonne) than Australian producers ($9.80), the geographical proximity of Australia to the Chinese market gives Australian producers a significant cost advantage.

Impact on Indian exports

How will the rise in freight rates impact iron ore exports from India? Australia's cost advantage can be exploited by Indian ore exporters as India is closer toChina. China will gain about $15 per tonne of ore exports from India due to this geographical proximity. What is likely to happen is that Australia and India, the current prominent players in the Chinese market, will continue to strengthen their positions edging out Brazil.

The cost of producing a tonne of iron ore in India is estimated at Rs 300 ($7) while its price in the international market is around Rs 2,000 ($45). Production of iron ore in India reached 146 million tonnes in 2005, about 169 million tonnes in 2006 and is forecast to increase to 181 million tonnes in 2007 with exports of close to 100 million tonnes. The exports to China alone are expected to be over 75 million tonnes. India has substantial iron ore reserves and the South-East Asia Iron and Steel Institute estimates that Indian iron ore deposits potentially amount to 12 billion tonnes of hematite and 5 billion tonnes of magnetite deposits.

Global market

Contract prices for iron ore have risen for four straight years and gained 19 per cent in 2006 as China almost doubled its output of steel. Goldman Sachs and Credit Suisse Group have said that Chinese ore production was expensive and predicted a gain in prices. Goldman Sachs, in September 2006, had forecast a 10 per cent increase while Credit Suisse, in July 2006, predicted a 5 per cent rise. Negotiations for April 2007 seem to have resulted in a price increase of about 9.5 per cent. Despite rising domestic ore production, China is reported to have imported around 320 million tonnes in 2006, a 16 per cent year-on-year increase. Higher freight rates from Brazil mean that Chinese buyers have been paying almost $20 a tonne more, compared with Australian imports according to Mr Mark Pervan, Head of Research at Daiwa in Melbourne. Australian iron ore costs $59 a tonne, he added.

Citing the favourable global spot market conditions, the Vice-President of the Federation of Indian Mining Industries (FIMI) is reported to have stated earlier that India had the largest share in the spot market for iron ore and has the benefit of being closer to China. Indian ore accounts for around 80 per cent of the spot market volumes and consists of mainly fines. He added that India's proximity to China would help it offer lower freight costs of $15 a tonne and would result in greater realisation by Indian companies.

The production cost of ore in India, according to the AME report, is about $12 per tonne, which is higher than that of Australia and Brazil. How could the production cost in India record a higher unit value than Australia and Brazil when the labour cost here is much lower?

The average production cost in India is about $7. The AME data on production cost include inland transport costs until the cargo is on board ships. The component representing average inland transport costs and port handling charges comes to $5 per tonne, taking the production and transportation cost up to the port of shipment to $12 per tonne. The average inland transportation cost in Goa is the lowest in the world, as the transportation is by barges.

In the current scenario, the overall transportation costs of ore to the source port by barges might come to $5 per tonne, taking the production and transportation to about $12 per tonne for Goan iron ore exports. Considering that about 60 per cent of ore exports is transported by road and rail to the ports the overall production and inland transportation costs, including port charges and handling costs, are unlikely to cost anything more than $20 a tonne.

Since the average FOB price of iron ore with an Fe content of 62 per cent comes to around $40 per tonne, the margin of profitability in Indian iron ore exports is indeed substantial. While the Indian iron ore exporters can easily absorb the duty element in their high profitability, the Chinese iron ore importers will continue to reap substantial benefits by paying lower freight rates for Indian iron ore imports. Hence, the imposition of duty on iron ore is unlikely to produce any significant impact on Indian iron ore exports.

(The author is a former Chairman of Mormugao Port Trust. He can be contacted at drjospaul@rediffmail.com)

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