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Goa miners face double whammy

As Goa readies itself for a new mining chapter it faces twin challenge of lackluster demand and oversupply, Vedanta honcho R. Kishore Kumar explains what’s the next step is

From being the world’s 3rd largest exporter to becoming a net importer—the iron ore industry in India has undergone countless hardships over the past few years. Exports before the Supreme Court mining ban (October 2012) stood at 47 million tonnes and had touched a peak of over 115 million tones a few years before and by October 2014 it fell to 4.4 mt a meager 10 percent of the pre-ban levels.

The MMDR Amendment Act, coal e-auctions, reduction of export duty on iron ore to 10 percent and renewal of mining leases in Goa—these unprecedented developments are an early indication of the government’s promise of ‘Achche Din’ for the industry and the nation.

With economic optimism running high, now is the time for the industry and government to join hands and become partners in progress. This collaboration must be generously tempered with a pragmatic approach. So while the worst is behind us, there are some key challenges ahead. How do we meet them?

To begin with, maximizing the viability of iron ore mining, optimizing the cost of production, regulating levies based on market conditions and creating a framework of policies that encourage domestic producers are some of the high priority areas that will catalyze the sector.

Slowdown & Oversupply

The recent commodity downturn has hit upstream, midstream and downstream companies across the world. Iron ore prices have plunged over the past one year by over 70%. Current prices are hovering at around $ 50 per tone, a sharp contrast from the $187/mt it had touched in February 2011. Prices of lower grades of iron ore of below 58% Fe, primarily produced in Goa have fallen further to USD 30 per tonne levels.

A greater threat to Indian miners is competition from foreign players. Where on the one hand, the price of iron ore remains tepid as the leading multinational companies across the globe have resorted to economies of scale—produce more at low cost. On the other hand, a sluggish global recovery is severely crippling the commodity markets, countries such as Australia and Brazil are pumping iron ore irrespective of demand. Adding to this is the slowdown in China has been undergoing structural shifts in its economy. This triple whammy is creating a rout across the commodity basket for over a year now.

India a key demand driver

It is essential that Indian companies maintain their focus on economic viability of business activities. Goa, for instance, mainly produces low-grade ore (below 58% Fe content) which historically has constituted half of the iron ore exports from India. While this product used to appeal the medium-sized midstream and downstream companies in China, the commodity conundrum has taken the sheen off this trend. That is because now, higher grade ores are available at more competitive rates.

It costs around $ 27-$30 per tone for Goan miners to produce the ore and get it to the local port.    However, to export the ore, a duty of 10% has to be paid.  This hardly leaves much room for margins in present times of lower prices. Hence, there is a need for complete abolition of the export duty, so that domestic exporters can stand up to the challenges posed by miners from Australia and Brazil.

As Goa readies itself for a new innings in its mining chapter, the state faces the twin challenge of lackluster demand and oversupply. Currently there is a glut of around eight million tons of iron ore in the ports of Goa.

For example, miners in Goa face double whammy currently – at one side is Supreme Court directed Goa Permanent Ore Fund, in which 10% of sales price has to be contributed and on the other is Contribution of an amount equivalent to royalty in the proposed District Mineral Foundation, which has come up post amendments in the MMDR Act. Add to this another 2% of royalty proposed as contribution towards National Mineral Exploration Trust. In today’s scenario of extreme low prices, this makes mining virtually a loss making proposition for producers of low-grade iron ore, particularly from a state like Goa which produces on an average 56% Fe. Traditionally, such grades have been considered as rejects or tailings.

Another issue which requires immediate attention of policymakers is separate freight charged by Indian Railway for iron ore meant for exports. Currently it is nearly double the amount charged as freight for iron ore meant for domestic transportation. Such rationalization in railway freight charges will help the industry and Indian economy in standing up to the challenge of cheap imports and loss of valuable foreign exchange since India is poised to grow at the rate of 7% for next several years.

Mining provides jobs to millions of Indians and is among the biggest source of employment creation. However, it requires government support in terms of abolition of 10% export duty, parity in railway freight charges between ore meant for domestic transport and ore meant for exports and abolition of Goa Permanent Fund.

The future of iron ore mining

The NDA government has done well to devolve legislative and administrative powers to the states. The MMDR Bill is a major breakthrough for the sector. Now states must take upon themselves the task of revolutionizing the sector and making it attractive. The GST Bill will transform India’s inter-state trade and will be capable of driving large volumes of business within the boundaries of the country.

While the industry is keen that the cap be increased it must provide suggestions to the government on how mining can be executed sustainably without affecting the environment.

India has the potential to produce 600 million tons of iron ore. This would not only meet domestic requirements but would also earn valuable foreign exchange by exporting low grade iron ore. However, this requires supportive government policies. This has been the case in commodities driven economies such as Australia, Brazil, Russia and the likes. India too must become a participant and reap the benefits.

What is clear though is that the way ahead must be paved in collaboration with the Central and State Government, bureaucrats, financiers, global peers and entrepreneurs who seek unchartered frontiers to be conquered. So what better than starting today?

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