Export tax on iron ore may hit steel industry

The imposition of a tax of Rs 300 per tonne on iron ore exports is likely to leave almost everyone unhappy.

It will impact the margins of mining companies and put a damper on their expansion plans. But domestic steel producers will also be unhappy as they will likely have to pay more for the iron ore lumps they use.

Unless fines were disposed of, lumps cannot be produced. Around 85 per cent of the total production of 75 million tonne of fines is exported.

With their overall expansion plans reined in, the mining companies are likely to step back production of both iron fines and lumps.

R K Sharma, secretary general, Federation of Indian Mineral Industries (Fimi) said, with low domestic utilisation of fines, some of the mines would have to cut down production to keep the fines in check, which would ultimately make less lumps available in the domestic market and push up prices.

On an average in iron ore production, 40 per cent is lumps and 60 per cent fines. Further, for supplying calibrated iron ore to all domestic sponge and pig iron plants, lumps have to be crushed to bring them to the specified size, which generated more fines.

Hence production of fines can be as high as 70-72 per cent. It is the export demand for these fines which is going to be affected by the export tax.

Karnataka-based Minerals Sales Private Ltd (MSPL), the second largest iron ore exporter from the private sector, said the tax was "unexpected" and raised doubts about the predictability of future government policy.

"Now we will think twice before expanding mining operations as we may have to absorb the export tax without passing it on to the buyers," MSPL Group Executive Director Rahul Kumar Baldota told Business Standard.

Sesa Goa Ltd, India's largest iron-ore exporter from the private sector, had stated the tax could lower profits. The company, 51 per cent of which is owned by Mitsui & Co, may report Rs 698 crore profit this year, according to a survey by Thomson Financial.

It posted a net income of Rs 540 crore in the year ended March 31, 2006. Profit for the first nine months of 2006-07 fiscal was Rs 354 crore.

Last fiscal, MSPL's revenues from iron ore exports were around Rs 1,000 crore. This fiscal, it is expected to touch Rs 1,300 crore.

"We will achieve the topline projected for 2006-07. But the bottomline will be seriously hit. We may have to put on hold plans to extract additional iron ore since the Chinese mills are very sensitive about prices," he pointed out.

India exports close to 90 million tonnes of iron ore to China every year. "Chinese steel mills found Indian iron ore lucrative because of the price factor. Now, Brazilian mining companies will gain advantage since they are offering competitive prices. Also, their grade of iron ore is better. From the logistics point of view too, they stand a better chance," he said.

In an effort to maintain the goodwill of the Chinese steel mills, the MSPL has decided to absorb the export tax for a specified period.

"We have signed agreements with various mills to supply iron ore. We will not alter the rates. We will absorb the Rs 300 per tonne tax. Unfortunately, the Chinese interest in Indian iron ore has come down drastically," he stated.

According to Fimi, exports in March 2007 were down by 33 per cent over exports in March 2006. "If the 10 per cent average increase, witnessed in the first 11 months, is taken into account, the exports in March will be down by about 40 per cent. This is due to the levy of export duty on iron ore," Sharma said.

International iron ore contract prices were hiked this year by 9.5 per cent. The average lump ore price per tonne is Rs 2,000-2,500 per tonne while cost of production is Rs 400-500 per tonne. Sharma, however, said, transportation cost was as high as Rs 1,600 per tonne to Paradeep port by road.