Shaky argument

The core argument made by Indian steel mills when asking last year for restrictions on iron ore exports was that India's steel requirements were set to grow exponentially, as China's has already done, that India's iron ore reserves were limited, and therefore that these reserves should be kept for India's own future requirements. That argument now needs a second look, following the report that the country's ore reserves may be more than previously estimated. Indeed, if iron ore reserves are going to be periodically re-estimated, just as oil reserves are, then the argument about finite stocks starts looking shakier than it seemed a year ago. The reality today seems to be that India does not really know how much iron ore it has below the ground, and the Hoda committee, which went into the whole issue, made elaborate proposals to reshape policy so as to facilitate prospecting and exploration, and thereby to enhance the estimates of proven and exploitable reserves.

Meanwhile, the market reality is that steel mills that have captive iron ore mines are continuing to sell iron ore, albeit in reduced quantities, in the domestic market even as they keep lobbying for a ban on the export of ore. The Federation of Indian Mineral Industries, the mining companies' lobby, has referred to such sales by SAIL, the country's top steel maker, and Tata Metaliks, which belongs to the same stable as Tata Steel, in April. The mining firms argue that ore sold in the domestic market enhances surpluses available in the country and therefore ends up boosting exports. And they have always claimed that the country's iron ore reserves are not going to run out soon. But it was the steel makers who drew blood last year by persuading the government to levy an export duty on iron ore in the Budget, leading to an immediate fall in exports. But the Chinese, who are major buyers in the spot market, have been able to dictate prices and get Indian mining companies to absorb a part or all of the tax. In retrospect, the whole sequence of actions does not seem to have had the desired results.

The main reason why Indian steel makers have not been able to use all the iron ore available in the country for steel making is that they have not made the investment in facilities like sintering (i.e. by applying heat to convert fines into lumps), without which iron ore fines cannot be used in steel production. Fines are raised as soon as ore is mined, because over half the ore produced is in the form of fines and the rest comes as lumps. To use only lumps and sell the fines is to skim the cream and sell the rest, which is not what you would do if you were seeking to conserve a precious resource. Mining companies export only fines, which few Indian steel makers seem to want. However, things are now changing as mini-steel plants are extensively using fines and large steel makers are growing rapidly, acquiring technology and laying out huge domestic expansion plans. The government should facilitate this capacity expansion instead of depressing iron ore prices by banning exports. Indian steel can and should be globally competitive because iron ore is available domestically at negligible freight costs, whereas Japanese and Korean companies have to ship the ore over long distances.