Raised ore royalty rate to hit steel buyer

TThe proposed move to increase the rate of royalty on iron ore from 10 to 15 per cent is likely to affect the entire value chain, right till the end or steel consumer. The Indian mining sector will be paying double the royalty compared to many other countries.

Already the rate in India is the highest at 10 per cent ad valorem (according to the estimated value). Western Australia is the next at 7.5 per cent. The mining sector fears if the rate is increased, it will not only impact margins  but also affect the end-consumer.

Finance Minister Arun Jaitley had in his Budget speech announced he would consider state governments' request for revising royalty rates on major minerals, pending since August 2012.

India is the highest taxed country amongst major iron ore producing regions with the proposed royalty rates. Brazil, the largest iron ore producer with domestic steel production comparable to India’s, has a rate of two per cent. Australia has a rate of 2.7 to 7.5 per cent (depending on ore type). South Africa has a rate of three per cent.

Queensland (Australia) has a rate of 2.7 per cent ad valorem, South Australia 3.5 per cent and New South Wales (Australia) four per cent.

D S Rawat, secretary-general, Assocham, said, "There is a huge demand-and-supply gap due to the mining ban in various states. If the rate is increased, miners will pass on the burden to steel companies and these will pass it to the end consumer."

In a letter to Finance Secretary Arvind Mayaram, Assocham has requested the government not to increase the royalty rates.

Recently, the railways ministry raised freight rates 15 per cent. Further increase in royalty will be completely detrimental step for the Indian iron and steel industry and Indian economy at large. "Therefore, for the cost competitiveness and sustainable growth of the domestic steel industry, we request the government for not to increase the royalty rate on iron ore from 10% to 15%", Assocham said.

R K Sharma, secretary-general, Federation of Indian Mineral Industries, said the sector had voiced its dissent to the proposed move.

"A 50 per cent rise in the rate will leave a cascading effect. Also, there are duties and levies directly linked to the royalty rate."

Setting up an integrated steel plant and developing of mining projects are high-risk investments as they have a long gestation period and require large investments in exploration before commercial production can begin. The steel industry should be incentivised by ensuring the availability of secure supply of raw material at appropriate price, Assocham said.

Until August 2009, the royalty on iron ore was based on Rs / tonne basis. Subsequently, the rates were changed to 10 per cent of sales price. Prior to the changes, Royalty was between Rs 8 and Rs 27 a tonne, depending on the quality of iron ore.