Will Iron Ore Exporters Benefit From Cut In Freight Rate?

DSIJ Intelligence / 10 Mar 2012

The Indian government, in order to provide relief to the iron ore exporting companies, has reduced the freight rate by Rs 497 per tonne in what has been hailed as a much-needed move.
The Indian government, in order to provide relief to the iron ore exporting companies, has reduced the freight rate by Rs 497 per tonne in what has been hailed as a much-needed move.  This will definitely benefit the iron ore exporters who were under pressure after an increase in export duty in January 2012.  The government had earlier raised the export duty on iron ore from 20 per cent to 30 per cent in a move to help the steel industry and to curb illegal mining and exports taking place from different regions in the country.

On the flip side, the railways have increased the domestic transport freight charges by 20 per cent on iron ore movement. We believe that this increase in the domestic freight charges and a reduction in export freight will lead to higher iron ore prices in the domestic market. The steel industry being a major consumer of iron ore will pass on the increased iron ore prices through a hike in the prices of steel.

As per an Indian Railways’ circular (No 36 of 2009), the freight rate on iron ore export was Rs 1,600 per MT which has now been reduced after the issue of a new circular dated March 5, 2012 to Rs 1,125 per MT on iron ore traffic meant for other than domestic usage for the iron and steel industry. This means a reduction of Rs 475 per MT in the overall cost applicable to the iron ore exporters with effect from March 6, 2012.

The cut in the freight rate for export has come just before the budget announcements, both union and railway. We believe the rate cut will be of utmost benefit to the iron ore exporters like NMDC, Sesa Goa, etc. However, the increased duty (30 per cent) on the export of all types of iron ore will continue to put pressure on their margins and therefore we expect a duty cut in the upcoming budget for 2012-13. This move has dried up exports from India, which fell by 28 per cent to 40 MT in the period of April to November 2011.

India is the third-largest iron ore exporter in the world due to the vast reserves in the country. After an increase in freight rates and taxes, the iron ore exports have come down to 97 MT in 2010-11 from 117 MT in 2009-10. Almost 70-80 per cent 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 per cent will be levied on both fines as well as lumps.

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