On May 3, India's Finance Minister P. Chindambaram announced a roll back of three unpopular budgetary measures, including one relating to iron ore exports. As a result, the export taxes for exports of low grades of iron ore (with iron content of less than 62 percent) were lowered from Rupees 300/mt ($6.7/mt) to Rupees 50/mt ($1.2/mt). Meanwhile, the exports duty on iron ore with iron content of more than 62 percent will remain at Rupees 300/mt. This Finance Ministry decision divided the country into two camps - those who welcomed it and those who were against the rolling back of the duties. In order to assess the respective positions, the roots of the problems - i.e. why the iron ore export duty was imposed in the first place - should be understood.
Who benefits from duty imposition?
India's Finance Ministry, after long and intensive lobbying by the country's steel industry, announced the imposition of an export duty of Rupees 300/mt ($6.7/mt) on iron ore. This duty, according to several independent estimates, added up to 10-15 percent to the price of one metric ton of iron ore exported from India. Meanwhile, the yearly rise in international iron ore prices, which came into effect from April 1, was set at the level of 9.5 percent. Consequently, the iron ore export duty damaged the competitiveness of India's iron ore exporters and ensured that the Indian iron ore market would experience a surplus of iron ore. The official argument behind this decision was the state's desire to discourage exports of iron ore so as to protect the country from ‘over exploitation of its natural reserves'.
However, domestic steelmakers had lobbied long before this decision for the introduction of an iron ore export duty and even for the complete banning of iron ore exports. The export of iron ore was mainly problematic for India's steelmakers as it hindered their plans to raise the country's crude steel production up to 110 million metric tons a year by 2010. Indian steelmakers voiced their concern that it was not profitable for the country to export iron ore at a relatively low price while later on importing finished steel products made from Indian iron ore. One of the players behind the scene was the giant domestic steel company JSW Steel. This producer was highly supportive of the government decision to introduce the iron ore export duty, arguing that not only the Indian budget would benefit from this duty but also that the country's booming steel sector would more easily be able to attract foreign direct investments.
On the other side of this dispute stood the Indian iron ore producers. The duty policy decision left many iron ore producers, who had been expanding their capacities over the last couple of years (to meet growing raw material demand mainly from neighboring China), struggling with the surplus of iron ore in the market. In addition, the iron ore producers' criticism of the government policy stemmed from the fact that Indian domestic consumers do not use low grade iron ore with iron content of 62-63.5 percent, and so they considered the government decision to be discriminatory.
As a result of the government's policy, not only has the market become overloaded with low grade iron ore, but also the Indian budget has not received as much as anticipated from the introduction of the duty.
Who benefits from review of export duty?
Under heavy pressure from both importers of Indian iron ore and domestic iron ore producers, the Indian government has come to the more thoughtful decision of partially rolling back the export duty for iron ore with iron content of up to 62 percent from Rupees 300/mt to Rupees 50/mt, while leaving a duty of Rupees 300/mt on iron ore exports with iron content of more than 62 percent.
Once again the Indian market was split by this latest decision. On the one side, the Indian iron ore producers welcomed the correction in the iron ore export policy. Directly after the announcement on May 3, a spokesman of the Goa Mineral Ore Exporters Association stated that the partial revocation of the duty would benefit the company's annual exports of iron ore by around 50 percent, which is equal to around 13 million metric tons.
On the other hand, the Indian steel industry harshly criticized the iron ore export policy amendment. An Indian Steel Alliance official has stated that the industry wants the government to double the duty in order to discourage exports and consequently to avoid a possible iron ore shortage problem in the market in the light of steel capacity expansions plans. Another steelmaker voiced the concern that if iron ore exports were to remain uncontrolled, by 2030 India would have to import iron ore to satisfy its needs.
Yet, weighing up all sides of the argument, it can be said that the new amendment to India's iron ore export policy will benefit all interested groups. On the one hand, the Indian iron ore companies will be able to dispose of low-grade iron ore which is not in demand on the market. Meanwhile, the export sales may help them to expand their high-grade iron ore capacities to later on satisfy the needs of domestic steelmakers. On the other hand, although the domestic steelmakers are speaking very negatively about the partial roll back of the iron ore export duty, the new decision may benefit the development of the domestic steel market in the long run by attracting additional investment into the industry. As for the Indian government, it may have found its golden mean. It has satisfied both parties - partially allowing exports of low-grade iron ore while restricting exports of high-grades of iron ore through the imposition of a heavy export duty.