 "Pellet units knocked by export duty headwinds")
Investors in iron-ore pellet plants are feeling let down by the surprise decision to impose five per cent duty on the export of the value-added product made from ore fines. Not only has the duty made pellets from here uncompetitive in the world market, the move also amounts to the government going back on its commitment to provide the still-nascent sector the necessary incentives to grow.
In two successive Budgets (2011-12 and 2012-13), the government had announced steps that laid the foundation for rapid growth of the pellet segment. The 2011-12 Budget proved a landmark for the iron-ore sector for two reasons. New Delhi, convinced by the arguments of steelmakers the natural resource iron ore had to be conserved, put a uniform export duty of 20 per cent (subsequently raised to 30 per cent) on lump ore and fines, in a departure from treating the two differently.
At the same time, it gave "full exemption from export duty to pellets" to encourage value addition to fines. In his next Budget, then finance minister Pranab Mukherjee went a step further to "encourage enrichment of low-grade iron ore" into pellets. The customs duty on plant and machinery for building iron-ore beneficiation and pellet plants was cut from 7.5 per cent to 2.5 per cent.
Back-of-the-envelope calculation shows in the process of mining ore, lump and fines are recovered in a ratio of 35:65, respectively. Incentives for local pellet development capacity were offered in the wake of the country exporting 117 million tonnes (mt) of ore in 2009-10 and 98 mt the following year. Steelmakers raised alarm about the high exports, in which the share of fines was 90 per cent. China was the principal destination.
"The domestic demand for fines being limited, exports were the only option for miners to evacuate fines. Even then, in years of high exports, we had to contend with overflowing pithead stocks of fines, which made normal mining difficult," says R K Sharma, secretary-general of the Federation of Indian Mineral Industries. The target of resource conservation led the government to peg the export duty and railway freight at levels that would automatically lead to our loss of custom in the world market. This created ideal conditions for local ore beneficiation and creation of pellet-making capacity.
Indiscriminate use of export duty levers and large-scale decommissioning of mines on grounds of alleged illegal mining and violation of environment laws are set to result in a fall in ore exports-from a high of 117 mt in 2009-10 to 15 mt in 2013-14. Expect some growth in production this year to 150 mt, owing to selective resumption in mining in Karnataka. The sector will, however, have to contend with the production cap in Odisha and the continuing mining ban in Goa. "The sharp production fall from 220 mt in 2010-11 gives an idea of the extent of dislocation in mining activities and the consequent employment loss and social unrest in some remote areas of the country," said an official from the sector. The production disruption in Karnataka, in particular, caused much hardship to steelmakers such as JSW Steel, which had to resort to imports, though at a reduced capacity.
All resource-rich countries have numerous examples of exponential growth in reserves of minerals when they were engaged in intensive mining, supported by rigorous surveying and prospecting. To give a boost to the discovery of finds, the government has wisely reduced the basic customs duty on machinery and equipment for surveying and prospecting to 2.5 per cent from 7.5-10 per cent. "We see a contradiction in the government's approach to mining. While it wants the resource base to continuously expand, as it should, punishing mining restrictions are militating against that," the official said.
More destabilising than policy contradiction is the unwarranted policy change that has now left pellet makers in a dilemma. Encouraged first by duty-free exports and then by big cuts in customs duty on the import of machinery for beneficiation and pellet-making, steelmakers, with or without captive iron ore mines, and merchant miners were investing heavily in pellet plants. The emerging sector also recorded a large foreign direct investment. Investments in the pipeline should raise the country's pellet capacity from 23 mt in 2011-12 to 120 mt in 2016-17. Such rapid growth has provided a major outlet to local use of low-grade fines. But the five per cent export duty, which comes when the domestic market for pellets is flat, is leading to the closure of plants. The ones that have suspended production include Stemcor's four-mt unit and Essar's six-mt tonne plant. Capacity use in the sector has fallen to 40 per cent, as pellet makers aren't able to recover cost by selling the product in the domestic or foreign markets. Mounting inventories are adding to the woes. It is, therefore, not surprising that the mines ministry wants immediate scrapping of the export duty.
In two successive Budgets (2011-12 and 2012-13), the government had announced steps that laid the foundation for rapid growth of the pellet segment. The 2011-12 Budget proved a landmark for the iron-ore sector for two reasons. New Delhi, convinced by the arguments of steelmakers the natural resource iron ore had to be conserved, put a uniform export duty of 20 per cent (subsequently raised to 30 per cent) on lump ore and fines, in a departure from treating the two differently.
At the same time, it gave "full exemption from export duty to pellets" to encourage value addition to fines. In his next Budget, then finance minister Pranab Mukherjee went a step further to "encourage enrichment of low-grade iron ore" into pellets. The customs duty on plant and machinery for building iron-ore beneficiation and pellet plants was cut from 7.5 per cent to 2.5 per cent.
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Back-of-the-envelope calculation shows in the process of mining ore, lump and fines are recovered in a ratio of 35:65, respectively. Incentives for local pellet development capacity were offered in the wake of the country exporting 117 million tonnes (mt) of ore in 2009-10 and 98 mt the following year. Steelmakers raised alarm about the high exports, in which the share of fines was 90 per cent. China was the principal destination.
"The domestic demand for fines being limited, exports were the only option for miners to evacuate fines. Even then, in years of high exports, we had to contend with overflowing pithead stocks of fines, which made normal mining difficult," says R K Sharma, secretary-general of the Federation of Indian Mineral Industries. The target of resource conservation led the government to peg the export duty and railway freight at levels that would automatically lead to our loss of custom in the world market. This created ideal conditions for local ore beneficiation and creation of pellet-making capacity.
Indiscriminate use of export duty levers and large-scale decommissioning of mines on grounds of alleged illegal mining and violation of environment laws are set to result in a fall in ore exports-from a high of 117 mt in 2009-10 to 15 mt in 2013-14. Expect some growth in production this year to 150 mt, owing to selective resumption in mining in Karnataka. The sector will, however, have to contend with the production cap in Odisha and the continuing mining ban in Goa. "The sharp production fall from 220 mt in 2010-11 gives an idea of the extent of dislocation in mining activities and the consequent employment loss and social unrest in some remote areas of the country," said an official from the sector. The production disruption in Karnataka, in particular, caused much hardship to steelmakers such as JSW Steel, which had to resort to imports, though at a reduced capacity.
All resource-rich countries have numerous examples of exponential growth in reserves of minerals when they were engaged in intensive mining, supported by rigorous surveying and prospecting. To give a boost to the discovery of finds, the government has wisely reduced the basic customs duty on machinery and equipment for surveying and prospecting to 2.5 per cent from 7.5-10 per cent. "We see a contradiction in the government's approach to mining. While it wants the resource base to continuously expand, as it should, punishing mining restrictions are militating against that," the official said.
More destabilising than policy contradiction is the unwarranted policy change that has now left pellet makers in a dilemma. Encouraged first by duty-free exports and then by big cuts in customs duty on the import of machinery for beneficiation and pellet-making, steelmakers, with or without captive iron ore mines, and merchant miners were investing heavily in pellet plants. The emerging sector also recorded a large foreign direct investment. Investments in the pipeline should raise the country's pellet capacity from 23 mt in 2011-12 to 120 mt in 2016-17. Such rapid growth has provided a major outlet to local use of low-grade fines. But the five per cent export duty, which comes when the domestic market for pellets is flat, is leading to the closure of plants. The ones that have suspended production include Stemcor's four-mt unit and Essar's six-mt tonne plant. Capacity use in the sector has fallen to 40 per cent, as pellet makers aren't able to recover cost by selling the product in the domestic or foreign markets. Mounting inventories are adding to the woes. It is, therefore, not surprising that the mines ministry wants immediate scrapping of the export duty.