Meet the Expert. ‘Regulatory issues are corroding iron ore’

As long as the demand for steel exists, demand for iron ore prevails (iron ore being the key raw material). And the steel sector is growing at a good pace with increasing global demand. The Indian steel industry has huge growth potential — that is evident in its poor per-capita consumption of steel of about 60 kg, compared with an average global per-capita consumption of 200 kg.

The capital-intensive steel companies cannot operate at lower capacities just because of the non-availability of iron ore. It will be imported, if not obtained domestically. I will say that the demand for iron ore in the next two-three years is cautiously optimistic and will be in line with the demand for steel.

Approximately 80 per cent of the world’s iron-ore trade is done by just four companies (in South America and Australia), and they mostly control the global supply situations. However, iron ore has always been abundant in supply. Indian steel-makers’ requirement is mostly fulfilled by domestic supply.

They are also privileged to consume high-grade iron ore, thanks to the rich quality of ores available in Indian mines. However, India also imports iron ore to a marginal extent.

A few steel-makers that do not own any captive iron-ore mines, either purchase domestically or import, based on the costs prevailing in the market.

There are forecasts that prices will fall this year. But I belong to another school of thought that believes prices will stabilise due to the strong fundamentals. As far as my experience goes, iron-ore prices are mostly range-bound in the medium term, and any price movement will not be drastic.

While it’s true that prices are unlikely to reach the level of 2008-2011, in my view, prices should stabilise at $60-70 per tonne CFR China (for reference grade of 62 per cent Fe fines with Alumina less than 3 per cent and Silica 4-5 per cent).

We cannot expect the steel industry to respond otherwise.

Iron-ore prices by NMDC (public sector miner) are always lower than the landed cost of imported ore of similar grade and the prices offered by private players.

NMDC is blessed with best-quality ore from Bailadila (Chhattisgarh) and Donimalai (Karnataka) mines. Comparison of ore prices from these mines with others in India would an apple and orange comparison. I also believe that NMDC provides iron ore at subsidised prices in India, compared with the prices at which they are exported.

The Supreme Court quashed the renewals given in 2015, stating that State governments can give only fresh leases and not renewals. Every mining company in Goa has generally three or more mining leases, and the whole production capacity has been limited to 20 million tonnes per annum (mtpa) as per an earlier Supreme Court judgement in 2014.

A significant portion of iron ore from these mines in Goa is exported as they are considered to be of inferior grades and not used by domestic steel companies. Therefore, the export market of the companies operating in Goa gets impacted. But there will not be much impact on the bottom-line of the companies as they hardly make any profit on their exports at current prices.

The economy of Goa, which is mainly dependent on the mining industry, will be hit. Nearly 40 per cent of the revenue from the sale of iron ore is transferred to the government in the form of royalty, district mineral fund, exploration cess, Goa Iron Ore Permanent Fund and other levies. The balance 60 per cent is spent on production and transportation cost locally, which has a direct impact on the State economy.

To put it in numbers, if the revenue from a tonne of iron is, say, $25 FoB (Freight on Board) (after ocean freight, discounts for low Fe, with high alumina and silica and high moisture), the amount that would have been transferred to Goa government directly is $10 per tonne (40 per cent of $25).

Now, as the mines will be inoperative, the local government would lose nearly $200 million ($10 x 20 mtpa) per annum.

In the same example, the cost of production is $15 per tonne (60 per cent of $25). If I use the multiplier effect at a multiple of 10, the economy would be suffering to the tune of $3,000 million per annum ($15 x 20mtpa x10) or about ₹20,000 crore.

One can imagine the enormity of the economic impact on a small State like Goa with a population of about 15 lakh due to the sudden stop of the decades-old mining industry.

Mining is a highly regulated industry in India. If regulatory agencies work with extreme urgency and everything goes well, it would a take minimum of two years. In the normal speed, it can take five years or so.

The iron-ore industry is primarily suffering from regulatory issues. All that is expected is maintaining stability and an implementable policy regime. There is no rocket science involved in regulating mining.

Many advanced countries do mining; why reinvent the wheel? Many a time, there appears to be a contradiction between the intent of the laws and judgements. Who will come forward to invest in a domain that has such complex regulations and dicey implementation?

One needs to remember that every metal can be substituted. Who can guarantee that 50 years down the line steel will still be used?

Iron ore shouldn’t meet the fate of mica, for which a substitute was found because of its unavailability caused by numerous restrictions and regulations placed on its mining.

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