Govt yet to work out iron ore pricing mechanism; firms want benchmarking

While the ministry of mines favours a benchmarked price, the ministry of steel vehemently opposes such a move

The Union government has dropped the proposal to cap iron ore prices but is yet to derive a pricing mechanism for the raw material. Some of the mining companies are pitching for a benchmark price for the raw material on the lines of oil and coal.

The pricing of iron ore has to be based on global parity and local demand and supply situation. The pricing of the end-product is market driven, according to a mining company official who does not wish to be quoted.

The ministry of mines and the ministry of steel are at loggerheads over the issue, with the former asking for a benchmarked price for the essential raw material and the latter vehemently opposing it fearing a spike in the price of the end product — steel.

The side favouring benchmarked iron ore prices reasons that internationally, the raw material in question and the price of minerals, in general, are benchmarked to a particular geography or country's price.

Citing an example, an industry expert said that as in the case of bullion (gold) or equity, where the prices are derived by a certain index, the same should be replicated for minerals. Benchmarking the price also means that the states get their due share of taxes, he added.

Currently, the Indian Bureau of Mines collates the price of iron ore from all the states and decides the valuation of Royalty every month.

Experts feel that the global prices can also be added to the basket and a particular price can be arrived at.

However, R K Sharma, secretary-general of the Federation of Indian Mineral Industries (FIMI), has contrary views on the subject of benchmarking iron ore prices as he feels that the methods, either auctions or buyer/seller agreements, under the current framework are better. He even fears that benchmarking of prices might lead to higher cost of the raw material and, subsequently, less off-take from the mines at a time when the country is sitting on surplus mineral.

According to a report from the Indian Bureau of Mines, in 2016-17, the country had excess iron ore to the tune of 149 million tonnes as against total output of 191 million tonnes.

"Volatility drives the mining industry. If the prices are high, the miners mine more. The prices can be benchmarked with the international market from the economic point of view but the fact remains that the price of coking coal (70-80 per cent of the total cost of steel) has a bigger impact on the price of steel than iron ore," Former mines secretary S Vijay Kumar said.

In March, Steel Secretary Aruna Sharma had said that the central government was working on a formula that might act like a cap on iron ore prices.

The steel ministry was of the opinion that the cap or benchmark would lead to lesser price fluctuations of iron ore. The need for capping or benchmarking was felt after the price of the raw material from China witnessed a rise earlier this year.

Experts believe China, which is the world's top producer and consumer of steel, is expected to boost infrastructure spending, and iron ore, which is used in making steel, could rally further.