Subir Roy: The gold rush for iron ore

VALUE FOR MONEY

The quick maturing of Indian business and the continuing high international steel prices have made iron ore into a bone of contention.

Ratan Tata, chairman of the Tata group and head of the Investment Commission, which is mandated to facilitate foreign investment (presumably in mining too), does not want the country to allow iron ore exports. His position is, allow the setting up of steel mills here but not the export of iron ore to make steel elsewhere.

B Muthuraman, managing director of Tata Steel, is more restrictive. He does not want Laxmi Mittal, the London based global steel player, to even set up a 10-million-tonne steel plant in Jharkhand, Tata Steel's home state. He referred to the fact that the Mittals live very lavishly in London and their business is not even listed, compared to the well distributed shareholder value that Tata Steel has created.

Tata group sources are underplaying Muthuraman's comments and seeking to focus on those of Ratan Tata. But even then things do not add up. Tata Steel itself exports iron ore and as recently as two years ago announced its intention to double its iron ore exports! More recently, Tata group seniors have freely talked about their intention to secure access to coal and iron ore wherever it can be had. Brazil's CVRD, the world's top iron ore miner, has been mentioned in this regard.

The Tatas will happily give up exporting the little iron ore they do but their search for tying up overseas supplies is likely to continue. So they are saying they will import iron ore but no one should export it out of India. Obviously, things have changed in the last two years and iron ore is not quite worth its weight in gold but hugely valuable nevertheless.

The stakes have become enormously higher and not everything that is going on can be publicly talked about. It is being whispered that people with large suitcases are walking around the states of Jharkhand, Chhattisgarh and Orissa and those who don't like suitcases, like the Tatas, and those who don't have suitcases, like SAIL, are hugely troubled.

The latter's position is the most hapless. It thought it had the large Chiria mines, via subsidiary IISCO, which it is now merging with itself. But the Jharkhand government has cancelled their lease because of poor exploitation and put the mines on the block. Many have applied for the right to these mines, including Tata Steel.

In the last two years, Indian steel companies have started to think big. They have a new confidence in their capabilities and, with global steel prices reigning high, see themselves graduating quickly as global players and major steel exporters. This was not so till even 2002. Indian steel producers were busy selling to the vastly more profitable domestic market courtesy the 20 per cent import duty on steel.

It is not as if Tata Steel is being seriously denied the iron ore it needs. The present reserves over which it has mining rights will last it 30 years, down from 50 because of their recent rapid expansion plans. Tata Steel has signed an agreement with the Orissa government to set up a 6-million-tonne steel plant there. Iron ore for this should not be a problem. The issue really seems to be that Tata Steel wants to assure as much iron ore for itself as it can conceivably want so as to meet its enhanced needs for the next 50 years.

Nothing wrong in that, except that state governments want revenue here and now. If you sit on reserves and want to exploit them 30 years hence, what happens to the state government's urgent need for revenue? As the Jharkhand chief minister pertinently told the same audience which had heard out Muthuraman, 54 per cent of the state's population live below the poverty line.

The immediate need for revenue from mining royalty has also motivated Orissa, another very poor state. It has reportedly finalised an agreement with Posco, the Korean giant, for a 10-million- tonne steel plant. The agreement almost came unstuck when there were furious protests that it had allowed Posco to mine far more iron ore than it would use for its own steel making in Orissa, thus leaving a substantial balance for export.

Posco said that Indian iron ore with high alumina content was not suitable for quality steel making here, metallurgists hotly disagreed and now Posco appears to have decided to import as much iron ore as it exports.

Why should Posco want to pay all that freight if the ore can be "beneficiated" to get round the problem? What is its ulterior motive? Things will get clear only after the deal is signed and the fine print known. Maybe it is beneficial for Posco to make steel in India if only to have an assured supply of its premium low phosphorous iron ore.

Today every steel producer will give an arm and a leg to have an assured supply of iron ore for the next 50 years. Indian companies, having woken up, now want to limit the damage and not see iron ore rights go out of their hands.

Not only is India's steel consumption grossly low, it is vitally necessary to raise it in order to develop, as China has shown, and Indian companies now have the capability and confidence to make steel cheaply to meet emerging needs and even export. Hence, the need to quickly change the rules of the game.

The steel industry is emphasising the virtues of value addition at home (the jobs and wealth created) through steel making. Having natural resources helps but Japan and Korea became great steel makers without a kilo of iron ore within their shores.

Why should a global company want to make steel elsewhere with Indian iron ore if Indian manufacturing conditions are competitive? The best companies in the world will source iron ore from wherever they can and make steel wherever it is the most convenient and cost effective. The government has to make India a cost competitive location and Indian steel makers have to measure up to the best in the world. The rest of the issues are really transitional.