Should India ban iron ore export?

Updated: Jul 30, 2010, 13:56 PM IST

Wealth unused might as well not exist - Aesop (620 BC-560 BC) Greek fabulist.

During the British Raj, the Empire used to export minerals and raw materials from India and dump finished products here – a major point in the Drain of Wealth theory. Half a century later, we still face a similar situation, albeit with a difference.

Today, despite our economic growth, we continue to export our valuable minerals to other countries in huge volumes. Recently this, prompted by a series of national and international events, has triggered a debate in the country on whether India should continue to export minerals, especially iron ore in view of its limited availability and huge domestic demand.

Similar discourses touched off in other mineral rich countries as well. Australia had recently decided to slap a 40 percent Super Profit Tax on all mining companies operating in the country`s soil. It later remodelled it as Mineral Resources Rent Tax and lowered the proposed levy to 22.5 percent, which may be introduced by 2012.

In India also, demands rose from several quarters for similar taxes to curb the unbridled mining and exports of resources. Assocham, a leading industry lobby in the country, has called for a levy of 40 percent on mining activities in a bid to curb exports of iron ore. The demand coincides with a similar proposal made to the Finance Ministry by the Mines Ministry for a windfall tax on domestic miners. The Steel Ministry has demanded a complete ban on iron ore exports. Facing rampant illegal mining, several states also have demanded controls on exports.

According to Karnataka Chief Minister BS Yeddyurappa, if iron ore exports were not checked, the “undue exploitation and illegal mining are likely to continue”. Chhattisgarh, which has roughly 20 percent of India’s iron ore reserves, has sought a ban on iron ore exports. NMDC chairman and managing director Rana Som also share the same view.

India is now exporting more than 100 million tonnes of iron ore every year. According to industry exports, the country cannot continue this trend for an indefinite period as it has to give more focus on the domestic market. Incidentally, China – the biggest consumer of minerals and another booming power – has been quietly increasing export tax on commodities like coal, coke and steel products in order to conserve the raw materials.

The country’s steel makers also share the same view. As most steel makers are gearing up to expand their production capacity, demand for iron ore is expected to soar in the near future. Therefore, putting restrictions on exports is good for the domestic steel industry.

Notably, India`s steel output is likely to more than double to 120.6 million tonnes by March 2012 from 55.1 million tonnes last year, still well short of China`s more than 600 million tonnes currently. Based on planned projects, the capacity could go up to 293 million tonnes by 2020, or more than five times the current figure.

Fact Sheet

India has one of the largest iron ore reserves in the world. According to Project Monitor, an internet newspaper on industrial projects, India`s iron ore reserves are around 22,000 million tonnes which will be sufficient for the next 150 years at the current rate of production.

At present, India is the world`s third-largest iron ore supplier and exports roughly half of its total iron ore production, mainly to China, which houses the world`s largest steel industry.

In the 2009-10, India produced 226 million tonnes of iron ore, up from 215 million tonnes in the previous year. Official data showed that exports have nearly tripled over the last decade, from 37.49 million tonnes in 2000-01 to 105.86 million tonnes in 2008-09. From April 2009 to January 2010, exports surged 10.5 percent to 89.20 million tonnes.

The price of iron ore has doubled in a year in the global markets and is now hovering around USD 120 a tonne. This, however, doesn’t always translate into higher revenue for the government. Thus, while iron ore exporters are reaping windfall gains, benefit to the exchequer is negligible when prices of ores increase in the market.

To restrict this, the government last year raised the export duty on iron ore lumps to 15 percent from 10 percent. Last December, it introduced a 5 percent export duty on iron ore fines. Over 70 percent of India`s iron ore exports comprise fines that are mostly bought by China, which has the technology to blend it with high-grade ores procured from Australia and Brazil.

Is a ban feasible?

Any clampdown on ore exports by India would send shockwaves through the USD 88-billion international market, forcing up prices and increasing Chinese reliance on top producers like Australia and Brazil.

China, which has the world`s largest steel mills, would then have to pay higher prices to procure the materials from other countries. Also, Indian miners would have to bear losses from lower prices offered in the domestic market. On the contrary, the export ban would come as a great relief for the domestic steel industry, which will get its raw material at a lower cost.

Some analysts say banning iron ore exports will also severely impact the mining industry by putting thousands out of their jobs. A similar propaganda was carried out by several Australian miners when Canberra announced its intention to impose the Super Tax.

Another bigger contention was that the country currently does not have the technology to process fines so it is better to export the rotting wealth.

Conclusion

True, India doesn’t have cutting-edge technologies at present. But, several giants including Posco and Vedanta are queuing up set up huge production units in the country. Obviously, they will bring in necessary technologies to harness the opportunity. Minerals and ores are precious and limited. They cannot be regenerated. Hence, should be used cautiously.

After all, India has to boost its steel output to meet its rising growth ambitions. Steel consumption is expected to rise many-fold as the country is giving special focus on building infrastructure. Scarcity and high prices of iron ore in the domestic market due to continuing large-scale exports will not be good news for the steel industry.

Given the larger interests of the country, the lawmakers should give India’s export policy a second thought.

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