Levies may make Indian iron ore less competitive

India may lose its competitiveness in the Chinese market if the government levies the market-linked royalty and export duty proposed on iron ore, said R K Sharma, secretary general, Federation of Indian Mineral Industries (FIMI).

The government is contemplating a 15 per cent levy on export of all types of iron ore. Additionally, it is also working on market-linked royalty on iron ore mining which, according to estimates, could rise to 10 per cent of the selling prices in the spot market.

Considering the two levies, the price of iron ore could rise up to 25 per cent, which will not be absorbed by Chinese importers in any case. As a consequence, our competitor, Australia, will take advantage of the rising Chinese demand, Sharma said.

The development assumes significance as India has factored in a 33 per cent price decline of Vale and Rio Tinto’s ore for Chinese, Japanese, Korean and European steel mills for their long term ore supplies. But, the two global mining leaders are presently engaging Chinese steel mills to accept the same price cut. But, the latter have been pressing for a price cut of over 45 per cent for long term ore supplies which if accepted, will make Indian ore uncompetitive in the Chinese market.

“But, much would depend upon the cost of freight. If the base price of iron ore falls, freight cost also falls in tandem. In case freight rates are maintained at the present levels or moves up, then exports from India would become unviable because of the high mining cost here,” said Rahul N Baldota, Executive Director, MSPL Hospet.

Exporters from India presently pay $15 a tonne as against $18-20 a tonne from Australia and over $25 a tonne from Brazil. Considering the range-bound spot price of iron ore between Australia and India, shipment from India remains profitable. But, any sops on freight cost from Australia or any such hike from India will worsen the export potential from here.

Meanwhile, in response to BHP, Vale and Rio Tinto’s pressure to conclude deals before June 30, China which is the world’s largest steel producer is ready to cut production and thereby, reduce imports of iron ore.

However, the price negotiator, the China Iron & Steel Association is readying to ask steelmakers to agree on a purchase price for spot ore to avoid a bidding war, should long-term contract talks fail with the world’s largest suppliers.

Iron ore prices have traditionally seen Vale, Rio and BHP, which between them control about 70 per cent of the global seaborne iron ore market, agree that prices in Asia have become the global benchmark.

If talks fail, then, the world will end up with oversupply. Production grew 3.6 per cent last year to over 1.7 billion tonnes, a seventh consecutive record, and planned projects could add over 430 million tonnes to production capacity between this year and 2011.

Now, since steel producers are presently witnessing poor demand from consumer industries, they are struggling to maintain the production levels to avoid stockpiling. Global steel majors, including Arcelor Mittal has cut production to pull inventories down.

China is estimating to import 517 million tonnes of iron ore this year compared to 480 the country imported last year. Banking highly on China, India shipped 90-91 million tonnes in 2008.