Miners to raise iron ore prices if royalty rates go up

After Finance Minister Arun Jaitley talked about raising royalty rates on major minerals, the iron ore mining sector fears ore prices will shoot up further. Currently, the royalty is charged at 10 per cent of the mineral value and it was last increased in August 2009.

The royalty rates are likely to be raised before the October quarter, as state governments have made a strong pitch for the hike. Generally, royalty rates are revised in every three years. However, it was not revised since August 2013, as the previous UPA government postponed it in view of the general elections.

"We cannot oppose any hike in royalty rates, as there is a provision for it in the mining Act. However, we will not have any choice but to increase the base rates of iron ore, as the cost of production has gone up in the recent years. The mining industry, which has been passing through a crisis in most states, will pass on the burden to consumers," said R K Sharma, secretary general, Federation of Indian Mineral Industries (FIMI).

State governments are the immediate beneficiaries, as minerals fall under the jurisdiction of the states. The states have demanded 15 per cent increase in rates. This means, their royalty revenues would go up by 50 per cent. Although exact royalty revenues of states are not available, it is estimated that in 2013-14 the state governments earned a little over Rs 3,000 crore -- a drop of 10 per cent over the previous year as the production of iron ore dipped due to ban in various states. The actual production value of iron ore stood at Rs 30,397 crore, a drop of 10.3 per cent over that of previous year, when it stood at Rs 30,877 crore. In Karnataka, the mining sector is already the most taxed and a raise in royalty rates will further hit the industry. If the royalty is raised to 15 per cent, Karnataka could increase its royalty revenue to around Rs 900 crore. It earned Rs 609 crore from 28 million tonnes in 2013-14.

"Royalty hike from 10 per cent to 15 per cent (if it happens) will not be liked by the industry. But, on the other hand, the hike wouldn't impact much of the eastern sector, which produces medium to high grades. These grades are readily absorbed in the market or/and can be exported, allowing the miners to create room to pay the extra royalty (if increased)," said Prakash Duvvuri, head of research at Delhi-based OreTeam Research.

On the other hand, lower grades will have a huge problem, as their demand is low and their sale prices are also low. So, the royalty hike will impact low-grade iron ore producers. Goa will be impacted, as they have to pay numerous taxes and duties other than royalty, post implementation of e-auctions, he said.

"In Odisha, the royalty -- which is currently being paid on fines -- is Rs 150 per tonne on fines costing Rs 1,500 (10 per cent of the cost is royalty). With the new royalty in place at 15 per cent, the same would become Rs 225 per tonne, which wouldn't hurt the miners. They have recently increased their prices in May and even if the royalty is hiked, at no point should they again increase their prices," he said.

After the ban in Odisha mines, the prices have gone up from Rs 1,800 for 63 per cent Fe to Rs 2,400-2,500 per tonne. The miners there might take a small rise if the royalty rates go up.

GREY AREAS

• FM announced revision of royalty rates on major minerals in Budget speech
• The MMRD Act provides for revision of royalty rates every three years
• The previous hike in royalty rates was in August 2009
• Presently, 10% of the mineral value is charged as royalty across the country
• Estimated value of royalty in all states in 2013-14 is little over Rs 3,000 crore