Duty hikes and rail freight increases are unlikely to have any significant impact on the competitiveness of India's iron ore exports.
The imposition of 5 per cent duty on exports of iron ore fines and doubling of tax on overseas sales of iron ore lumps will make Indian exports less competitive, the Secretary-General of the Federation of Indian Mineral Industries, Mr R. K. Sharma, is reported to have said. Iron ore exports will also fall lower than the 105 million tonnes exported in 2008-09, the statement said, adding there would be a shortfall of 4.5 per cent on the previous estimate of 110 million tonnes (mt) by 2009-2010.
According to the General Administration of Customs, Australia, Brazil and India remained the largest iron ore suppliers to China in 2009. Imports from Australia rose by 42.9 per cent to 260 mt, from Brazil by 41.5 per cent to 140 mt, and from India by 18 per cent to 110 mt. IIron ore imports to China rose by 41.6 per cent year-on-year in 2009 to touch a record 630 mt.
Steel Ministry proposal
Another report suggests the Steel Ministry has proposed hiking export duty to 20 per cent on all grades of iron ore from the 10 per cent imposed currently on iron ore lumps, pellets and 5 per cent on iron ore fines.
With effect from March 17, the Indian Railways has increased freight rates on iron ore export by Rs 300 a tonne. What are the cost components of India's iron ore exports, and will the existing and proposed duty hikes have any significant impact on export competitiveness?
A case study
The price of a product in the international market depends on the production and distribution costs. Transport cost is an important component of distribution cost. A recent shipment of iron ore fines with 62 per cent ferrous content through the Krishnapatnam Port in Andhra Pradesh was taken for case study. The ship completed loading in 48 hours, with an average loading rate of 50,625 tonnes a day.
The iron ore fines were transported by rail from Bellary and Tumkur districts in Karnataka through the Banasandra railway station to Krishnapatnam Port over a distance of 410 km. The iron ore was then stored on the port premises, handled at the port and all pre-shipment formalities completed.
The one-lakh tonne consignment was shipped to the Chinese port of Zhanjiang. Price variations over the past two years suggest that the f.o.b. (free on board) value fluctuated between $50 and $115 with a mean value of $83. The CIF (cost, insurance and freight) value fluctuated between $70 and $158 with a mean value of $114. The freight rates between Indian and Chinese ports fluctuated between $9 and $33 a tonne with a mean rate of $21 a tonne.
The current f.o.b. price in the Chinese market for iron ore with 60 per cent ferrous content is about $97 a tonne ( umetal.com). With the increase in rail freight of Rs 300 a tonne, the rail cost — including loading and unloading in port area and transfer to ship — works out to $33 a tonne, production cost $10 a tonne, handling charge at the port $5 a tonne and wharfage to Krishnapatnam Port $1 a tonne, and agency commission $1 a tonne. With an addition of 5 per cent, the duty is about $4.15 a tonne. Profitability works out to $42.85 a tonne.
Duty vs profitability
The analysis shows that with f.o.b. price at $97 a tonne the profitability comes to 44.18 per cent with a 5 per cent duty and shrinks slightly to 38.45 per cent with a 10 per cent duty hike.
About 40 per cent of India's iron ore exports are channelled through Goa where the predominant transport is through barges which costs less than $2 a tonne; the cost of transportation from the mine head to the jetty head, loading on to barges and unloading on ship works out to about $4 a tonne. This clearly shows higher profitability for iron ore exports through water transport rather than rail transport.
Therefore, the 5 per cent duty hike or a future hike of 10 per cent on export of iron ore fines, and even the current increase in rail freight by Rs 300 a tonne will not make any significant impact on India's export competitiveness, as such increases can easily be absorbed in the profitability and the periodic price increases for iron ore exports.