Iron ore export duty should be rolled back

The hike in export duty on iron ore in two phases in 2012 will have severe implications for the iron ore industry. In the first phase, duty was raised to a flat 20 per cent ad valorem on lumps and fines, against 15 per cent on lumps and 5 per cent on fines. In the second phase, the duty was raised to 30 per cent ad valorem on December 30.

The fall in exports in 2010-11 of about 20 million tonnes (mt) was primarily because of the ban imposed by the Karnataka government in July 2010. But the drastic fall in exports in 2011-12 is directly attributable to the increase in export duty and railway freight rates. With a modest export of 50 mt, export duty at 30 per cent would surely not be a respectable revenue earner. Iron ore mining industry in India, paradoxically, is highly taxed, which has made it uncompetitive in the international market.

LOSSES EVERYWHERE

Of the sales realisation on the export of fines, the industry spends 45 per cent on logistics (39 per cent being the rail freight); 10 per cent on royalty; 30 per cent on export duty and 10 per cent on port-related charges. Very little is left for the industry to invest on scientific exploration and mine development.

With export declining and no corresponding increase in domestic demand, production has declined and State governments will earn less royalty. Declining economic activity in the mining zone has rendered labour unemployed. In such a situation, neither the Central government nor State governments have gained. And, nor has the Railways or the iron ore industry.

In 2010-11 the steel industry consumed 103.25 mt of iron ore, against a production of 208 mt. With pithead stock at the beginning of the year at 75 mt, total availability of ore was 283 mt. After export of 97.66 mt, there was a comfortable stock of 82.09 mt of ore within the country. In other words, there was no shortage of iron ore for the domestic steel industry.

Therefore, the argument that the domestic steel industry is facing a shortage of iron ore is a myth. What is being exported is not required in the domestic market.

Out of exports of 97.66 mt in 2010-11, 89.84 mt or 92 per cent were fines. Lump ore accounted for only 7.82 mt or 8 per cent. Seventy four per cent of the lump ore was below 62 per cent Fe, mostly from Goa. The balance of about 2 million tonnes lump ore was exported by NMDC under long-term contracts with Japanese and South Korean steel companies.

We seem to have created a situation where iron ore (particularly fines) can be purchased in the domestic market at throwaway prices, with miners being deprived of the advantage of international prices.

Large areas have been reserved or leased out as captive to SAIL (40 per cent of total known haematite resources) and TISCO (20 per cent of total known haematite) resources. Though the area under actual mining with stand-alone private mining companies is hardly 10 per cent of the known resources, addition to haematite resources has been on account of exploration work of private lease-holders.

LIMITED EXPLORATION

Even after mining 997 million tonnes of iron ore between April 1, 2005, and December 31, 2010, haematite resources have increased by 3,252 million tonnes. Keeping large areas reserved or granting them as captive to steel plants does not lead to increase in resources.

It has cost India heavily in terms of opportunities lost. In 1980, India's haematite resources were 11,470 million tonnes (mt) and they increased to 17,882 mt in 2010; for Australia the resources of 15,000 mt increased to 40,000 mt during this period. This is despite Australia having exported 8-10 billion tonnes during this period. If we assume 20 billion tonnes of additional discovery of iron ore, the opportunity loss works out to $1 trillion (at mine-head price of US$ 50 per tonne).

Instead of keeping large areas under a handful of steel producers, more areas should be with stand-alone mining companies. Such an arrangement would lead to faster exploration.

While increase in railway freight and in export duty have rendered Indian iron ore uncompetitive in the world market, Australia and Brazil have gained. Since the export of fines and lumps has become unviable, there will be scaling down of domestic production of iron ore. Since lumps and fines are mined together, production of lumps will also be affected if there is no outlet for fines. Shortage of lumps would make such ore costlier. This will lead to increase in the prices of steel in domestic market.

The cumulative effects of the increase in export duty, railway freight and port charges have been harmful for the industry and economy. Negative interventions have always had an adverse impact on the mineral industry. For example, the mica industry suffered after canalisation of export. Synthetic mica was developed with better chemical and physical properties. No country imports our mica today.

The same holds true for manganese. Ninety five per cent of the manganese mines are closed today and the deposits will be lost forever. Similarly, export duty on iron ore has not brought any gain to the economy. There is a case for a rollback.

(The author is former Coal Secretary to the Government of India)

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