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Economics of Goa’s iron ore

If mining is to remain a major economic activity in Goa, there is a need for sustainable volume, process and cost structure, along with making mining more community friendly with latest technology and state of the art infrastructure to support scale, writes P K MUKHERJEE
International price of iron ore has moved downwards in last 6 months by about 30 per cent and Goa’s average grade of Fe 55/54 per cent with alumina of 4/5 per cent, now is priced at $56.25 per dry metric tonne (dmt) refer my steel index of July 11. However, the price quoted above is as per the actual transaction value which is of Australian ore, the chemical composition of which other than Fe, are much better than Goan ore. Goa is out of the international market for last 2 years and if any miner or for that matter any other ‘experts’ (for becoming ‘experts’ in mining one need not be a mining engineer or geologist or management graduate but can portray oneself with cooked up romantic figures and with good vocabulary) asks the buyer to buy Goan ore and that too in millions of tonnes in a year (read 20 million tonnes), it’d be next to impossible unless given hefty discount to the current ‘lucrative’ price as stated above. This factual position is corroborated by the fact of Zero exports of auctioned ore necessitating a long pause in auction of stacked ore (when last auction was done?).
Therefore, with the current price of Goa’s average grade, and with pre closure cost structure of 2012 on the then volume, there is no economics. Based on the above price of Fe55/54 per cent currently, the direct share of duties/taxes/royalties/contribution to statutory fund, works out to 50 per cent of revenue approximately while the share is north of 50 per cent on higher grade. With addition of taxes on inputs, the share is further higher. One needs to keep in mind that when we talk about cost structure, it is without interest or opportunity cost of investments made in machineries, plants, jetties and other equipments, besides recovery of principal investment. And conveniently there are talks about only state’s share (with some design behind it, of course!). In the federal fiscal regime in India, major share of the duties and taxes go to central government, be it mining or any manufacturing activity. So, what is the way out for Goan ore?
Sell only higher grades which still is economic or gives some profit and consider lower grades as waste or overburden to be dumped carefully as there is a regulatory obligation to stack all ore of Fe 45 per cent and above. Result is damaging change in cost structure, besides pressure on environment, owing to higher waste mining and higher quantum of wet processing to upgrade more ore – with lower volume of economic ore, the cost goes up not only for higher ore-waste ratio and processing loss in wet processing, but also due to incidence of fixed cost (I’m presuming that at least the ‘experts’ are understanding this).
Hence, market economics would automatically lower the volume permanently. And dump sale? I think the readers are knowledgeable enough to understand how realistic are those romantic ideas in the current price scenario. It’s also surprising to see some people are throwing calculations of value of iron ore reserves of 1,300 million tonnes over 65 years, price realisation of next 10 years at current price, etc, when the Goldman Sachs or Credit Suisses or Morgan Stanleys of the world are predicting downward prices for next 2/3 years (beyond which no predictions are made). It’s reported that Rio Tinto is increasing its volume to China by 20 per cent and Fortescue by 29 per cent after completing massive expansion projects. These two suppliers’ increased volume this year itself would by almost 60 million tonnes. With increased volumes, their cost is coming down due to economies of scale while there are closure of mines in China one after other. Hence the forecast of prices by real experts of the world is backed by strong economic fundamentals.
But our ‘experts’ are in serious calculations of thousands of crores of Rupees of surplus funds to be generated by sale of Goan ore. In which world we’re living! Of course I do not know if the assumption is no cost to be incurred for mining/transportation/shipping. And in reality, we’re reducing volume, increasing costs and to top it up, trying to find new nomenclature of duties, cess and taxes.
With the above backdrop, if we believe that mining will remain a major economic activity in future Goa, all of us need to think positively to keep Goan ore competitive in international market while the mining to be more community friendly with latest technology and state of the art infrastructure to support scale. Sustainable volume, process and cost structure can indeed be saviour of Goan iron ore mining.
(The author is a Chartered and Cost Accountant, ex MD of erstwhile Sesa Goa and retired as Executive Director (Iron Ore Business) of SesaSterlite Ltd)

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