Firms to absorb new tax on iron ore exports

The new tax of Rs 300 per tonne on exported iron ore has ended the days of super profits for ore exporters as they have decided to absorb the tax to honour long term contracts with buyers.

After the introduction of the tax, there are no takers for certain grades in spot trading as the tax has reduced buyers' ability to negotiate lower prices. Close to 75 per cent of iron ore exports take place through spot trading.

While the top iron ore exporting companies such as the state-owned Minerals and Metals Trading Corporation (MMTC) operate on long term contracts, private players work across long-term, mid-term and spot trading.

MMTC, the largest iron ore exporter (accounting for 15 per cent of overall exports), will be the worst hit. The PSU, which has long term (five-year) contracts with China, South Korea, Japan and the West Asian countries, will have to bear the additional tax burden. Sources said it has been lobbying hard for withdrawing the tax.

Sesa Goa and Mineral Sales Private (MSPL), the top two iron ore exporters from the private sector, have also decided to absorb the tax for long-term and short-term contracts.

At the same time, spot trading has almost come to a standstill since Chinese steel mills are very price-sensitive. Consequently, the margins will be hit. The quantum of reduction in the bottomlines will be known only in the coming months.

"No buyer will agree for a review of rates. We have no choice other than absorbing the tax. This will impact margins," Sesa Goa Managing Director P K Mukherjee told Business Standard. The profit margin of Sesa Goa in the first three quarters of the current year has been 44.2 per cent.

During 2005-06, Sesa Goa exported nearly 9 million tonne of iron ore. It expects exports to remain the same during 2007-08. "In fact, the imposition of tax has taken us by surprise. This may create a negative impact. In the last two years, the freight charges for iron ore have increased by 60 per cent. When we take all these into consideration, the tax on exports appears unfair," he contended.

Iron ore fines and not lumps account for bulk of the exports. Around 85-90 per cent of the total production of 75 million tonne of fines is exported. The lumps are consumed by the domestic market. Sesa Goa extracts iron ore from various mines in Goa.

While iron ore mines in Goa produce 15 per cent of lumps for every tonne, mines in Karnataka produce 25 per cent to 30 per cent of lumps per tonne. This makes Karnataka an attractive destination for iron ore mining, since less of fines are produced. Sesa Goa has applied for mining leases in Karnataka.

MSPL too has decided to absorb the export tax. "We will honour all commitments made to our foreign buyers. This will definitely affect the bottomline," said MSPL Executive Director Rahul Kumar Baldota. The firm's revenues from exports are expected to touch Rs 1,300 crore this fiscal as against Rs 1,000 crore last year.

The company exported 3.8 million tonne of iron ore in 2005-06 and it is expected to export 5 million tonne this fiscal. However, it is worried about the future of spot trading. "It has dropped significantly. At any given time, there were 10 ships waiting for iron ore loading at the ports under spot trading. Now, it has come down to just one ship. The situation is really bad," he pointed out.

MSPL is yet to decide on cutting down iron ore production. "The finance minister has agreed for a review of the imposition of the export tax. We will wait and watch for another month before taking any decision," he said.