Subir Roy: Everybody loves a rent income

VALUE FOR MONEY

The battle between the steel producers and iron ore exporters will not abate right away but clearly steel producers are winning. The inter-ministerial group on iron ore export, constituted by the Prime Minister's Office, has submitted a draft policy calling for restriction on export. These should be frozen at the current levels for higher grade ore (with an Fe content of 64 per cent and above) for the next three years. After that the matter should be reviewed, and in particular, all long-term export agreements should be reviewed at the time of renewal.

This is not surprising. Who wins an argument has a lot to do with who is more powerful. Right now, iron ore exporters, who are barely corporatised, are no match for the captains of Indian industry leading the steel sector. A couple of decades ago it was the steel industry which was the underdog and importers of steel and machinery had the upper hand. Then SAIL, put off by the clout of engineering firms (steel users) in the CII, threatened to quit the body.

The Indian steel industry is taken more seriously now because, led by Tata Steel, it has taken great strides in achieving global competitiveness. More importantly, it has learnt to think big, is actively making international acquisitions and shows every sign of having developed a mindset and desire to become a global winner. This is something it should have done long ago. Till 2004-05, Tata Steel, now at the forefront of the campaign to ban iron ore export, was itself making such exports.

The case for banning iron ore export rests on the conventional preference for maximising domestic value addition. Leftists, traditional nationalists and opportunistic politicians like Steel Minister Ram Vilas Paswan root for a ban. But it is also important for the Indian steel industry to be globally cost-competitive. If it has iron ore next door then it should be able to easily bid for that and win against foreign plants, which will have to add considerable freight charges to their conversion costs to be able to produce steel competitively.

Every businessman loves to reap a rent income. If you ban iron ore export their prices will go down and steel mills will be able to access iron ore at below global prices. If in a few years global iron ore prices take a tumble, Indian steel makers will be happy to import iron ore if Indian iron ore producers cannot match landed costs. Lakhs of cotton farmers have been impoverished (some of them in Vidarbha have lately committed suicide) because of the way cotton prices have been kept low by restricting export at the behest of the Indian textiles industry. The counterpart of the cotton farmer in this case is the adivasi in Jharkhand and Orissa, the most impoverished among Indians, whose interests should come foremost.

Major steel makers want a ban on iron ore export also because that makes it easier for them to get allocation of captive mines. A secure supply of a key raw material for the next 50 years brings about a sea change in the stability and security environment of a steel maker. Also, in the current global commodities boom, iron ore, like oil, is being increasingly perceived as a national asset and governments are more eager than ever to regulate its export. However, not all the power in the hands of Opec could prevent oil from trading at $12 a barrel about a decade ago.

Keeping in mind the need to balance all these considerations, the committee headed by Planning Commission member Anwar-ul Hoda, entrusted with the task of outlining the country's minerals policy, came out against banning stand-alone iron ore mines or export. Instead, it recommended an end to canalisation of exports and imposition of a tax on the export of higher grades of iron ore. Such a rate can be regulated to mop up any windfall gains the steel industry can be making because of export restrictions. It also suggested incentives to encourage reconnaissance and prospecting so as to add to country's reserves.

Critically, it recommended that mining leases for prospected deposits be transparently auctioned. But where it fell down was to allow a loophole, saying that a state could do away with this auctioning in order to attract local manufacturing. The net effect will be something quite invidious. Export of iron ore will be permitted but an iron ore-rich state will be able to effectively tilt the balance against supply to another Indian state!

The one interest group whose voice is heard very little in this long debate is that of iron ore exporters. They have made the valid point that iron ore reserves are not written in stone. All arguments on how long reserves will last are based on estimates derived from shallow prospecting and taking into account only iron ore of high Fe content (55 per cent plus). They have also claimed that the steel producers are being disingenuous by averring that the Supreme Court has banned the mining of magnetite iron ore when all that it has done is banning mining in the Kudremukh natural reserve.

Additionally, steel makers with captive mines leave around large piles of iron ore fines, which is environmentally unsound. What they should be doing is making the necessary investments so that the fines can be treated through cintering and pelletising. By using only lumps they are simply enjoying the low hanging fruit. Iron ore exporters claim that 70-72 per cent of iron ore produced in the country is fines and 84 per cent of exports are fines. Steel producers need to counter these arguments.

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