Iron ore export duty hiked to 30% to curb illegal mining

Illegal mining and export of iron ore in the country has forced the Indian govt. to increase the excise duty from 20% to 30% on Dec 30, 2011. The increase in export duty is a major decision taken by the govt., keeping in view the competitiveness of the global trade market. This has also been done to protect the Indian steel industry, which is facing severe problems with regard to the availability of iron ore at fair prices, and is the second such move in the current fiscal. The first hike came in during April 2011, increasing the duty from 15% to 20%.

India is the 3rd-largest iron ore exporter in the world due to the vast reserves in the country. Due to the increase in freight rates and taxes, the iron ore exports came down to 97 MT in 2010-11 from 117 MT in 2009-10. This move will further dry up exports from India, which fell 28% to 40 MT in Apr-Nov, 2011, the Federation of Indian Mineral Industries' Secretary-General R. K. Sharma said in the press.

Almost 70%-80% of the iron ore that is exported is in the form of iron ore fines, which are not utilised in India due to lower Fe (Grade) content. This iron ore is mainly exported to China in the spot market. The export duty of 30% will be levied on both fines as well as lumps.

Sesa Goa, which is the largest iron ore private player in India, will be impacted the most by this move. The increase in export duty will lead to higher prices of exported iron ore. However, if the higher prices do not match the international purchase parity prices, the company may have to sell the ore at lower margins in the international market or may have to bring down its exports to sell in the domestic market. The latter, we believe, is difficult as Indian steel companies do not use much of iron ore fines. Therefore, an increase in export duty may lead to lower margins going forward. After the announcement, the stock price came down by almost 3%.

On the other hand, following the announcement, JSW Steel, which is one of the biggest iron ore consumers and which was finding it difficult to get iron ore due to the ban on all the mines in Karnataka, was up by 9% in the last 2 days. The higher export duty will lead to reduction in exports, and JSW Steel, which has the technology to use iron ore fines, will be benefited from this development.

As per media reports, the Shah Commission members, in a recent visit to Odisha, asked the state govt. to restrict excess ore production to conserve the resource for future requirements.

In the past, the Indian govt. was looking for various measures to curb illegal mining and export in the country. To this end, it imposed a ban on mining in Karnataka, which ended up affecting steel companies as well. They also discussed channelising iron ore through PSU mining companies, though some officials were of the opinion that this will not solve the problem in the long term. Therefore, this time, the govt. did not want to ban mining. Instead, they favoured the option of increasing the duty on exports to curb illegal mining and exports from the country.