Iron ore exports set to crash

"Export margins would be eroded to nil if these proposals, currently awaiting notification, are levied," said SBS Chauhan, advisor, Federation of Indian Mineral Industries (FIMI).  Railways minister Laloo Prasad Yadav proposed a 40 per cent rise in freight rate in the Railways Budget. The ministry of mines has proposed a royalty rate of 10 per cent on total sales of minerals.  Even though the proposals are yet to be notified, industry sources feel the domestic market would face a glut of supplies of fines and lumps.  Domestic steel producers, ironically, procure only lumps (above 63 per cent of Fe content) while fines (below 63 per cent) are exported. Chauhan said the government must direct domestic steel producers to procure fines as well. Otherwise, the storage of fines would evolve into another problem over a period of time.  Provisional data indicate a marginal decline in iron ore exports to 93 million tonnes in 2007-08 from 93.7 million tonnes in 2006-07.  The stagnation in iron ore exports has largely been attributed to surging freight costs (ocean and railway), infrastructure bottlenecks, shortage of ocean vessels and export duties.  According to FIMI sources, various levies by the government have already eroded exporters' margins to 10 per cent from 14 per cent in 2004-05 in the eastern region. Margins have also slumped in the Bellary Hospet region from 32 per cent in 2004-05 to 24 per cent.  Average transportation charges, including freight and port, have more than doubled to Rs 1,919 a tonne in March 2008 as compared with Rs 832 a tonne in Bellary Hospet. In other parts of the country, the same have gone up to Rs 2,565 a tonne from Rs 1,250 a tonne three years ago.  Although, prices of iron ore have surged substantially during the period to $115-$125 a tonne now from $50 and $55-56 a tonne in 2004-05 in the eastern region and the Bellary sector, respectively. However, a dramatic erosion in margins may not lure exporters to continue with the shipments.  Indian exporters, however, have failed to capitalise on China's voracious appetite and supply constraints from Australia and Brazil due to inclement weather and port congestion to bargain better prices. About 90 per cent of Indian ore is exported to China.