What moves metals on home turf

Import policy, demand, and limitation increase prices for State-owned companies

Metals are truly global commodities, produced in mines where supplies exist and sold through exchanges where there is demand. And based on economic cycles and geo-political situations, their prices go through up and down cycles.

Still, local prices in different countries do not often closely track the exchange-quoted prices. There is many a difference due to region-specific factors that lead to metal prices charting a graph of their own. And India is no exception.

Indian differences

Metal prices in a country face complex dynamics, driven by political, environmental and currency-related push and pull. Often, countries tend to be either primarily producers or consumers; it is only rarely that they are both.

Producer nations tend to formulate their policies and make investments to maximise revenue. For example, they may devalue their currency or dump output to influence the market. On the other hand, consumer countries may look to owning mining assets globally to manage price volatility.

India is different in that it is rich in many metals — aluminium, iron ore, coal, manganese and zinc, among others. And being a growing economy, it is also a large consumer of these commodities. As a result, policies and prices are more difficult to tune.

Also, mining operations globally are typically carried out by private companies that own or lease mines. Due to the large initial investment to gain access to mine assets, they tend to be heavily debt-laden.

In India, mines are, by and large, owned by public sector companies. They are handed over mines from which they earn profits; many, such as Coal India, are monopolies. Others such as MOIL have access to the best grade ore. As a result, they are cash-rich.

With the government as their majority shareholder (often with 75 per cent shareholding) they have the privilege (and in some cases pressure) to set price levels that may be unrelated to global prices.

Policy push

Globally, it is well-established that governments create or reverse commodity cycles, as their policies can alter both the supply and demand side, influencing prices. For example, a producer nation clamping down on exports has two effects. One, globally price may increase, at least temporarily, due to reduced supply. Two, in the producing country, there is a supply glut, dampening prices.

The converse happens if there are import restrictions. A consuming country may try to reduce imports by increasing duties — to counter dumping or to revive local production.

One recent example of import restrictions in India was in the steel sector. The government imposed Minimum Import Price on steel products. As a result, imports fell and helped local price increase. The price of raw materials such as iron ore, coking coal and manganese have also been buoyant, with higher steel production and price, benefiting miners such as MOIL, NMDC and Coal India.

Growth-driven

Another reason why prices may race ahead in a high-growth country such as India is high demand. Prices may zoom especially if there is any hit in supply. For instance, when there were mining bans, private iron ore miners were unable to continue operations. Prices increased substantially, benefiting State-owned NMDC.

Likewise, when aluminium smelting capacities were added but bauxite ore was not made available, State-owned Nalco was able to profit from the sale of processed ore to private players.

Also, as buyers are concerned about landed cost — cost of product plus transportation — the local producer may be able to get higher realisation. There may also be long-term purchase agreements to reduce the risk of non-availability. Prices may be locked in at higher levels, even if global prices dip.

Balancing act

There are times when high demand and supply crunch may not translate into high profits, as there is no free market for mined products. A case in point is coal where there is typically unmet demand. State-owned Coal India does not raise prices based on demand as higher fuel prices would mean higher cost of power that will have to be passed on to consumers. And given the distress situation in State discoms, the government tries to ensure that Coal India’s prices are kept at levels that are also fair to the power sector and consumers.

However, when buyers are not State-owned companies, the balance may appear to tilt slightly towards State-owned miners. For instance, NMDC was taken to court by the Karnataka Iron and Steel Manufacturers Association for taking undue advantage of the acute iron ore shortage in the State. The Supreme Court, however, rejected the plea and allowed NMDC to set differential pricing based on market forces.

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