Proposed curb on free pricing of iron-ore may trigger face-off with India's miners

KOLKATA (miningweekly.com) – The Indian government has started working on measures to curb free pricing in the iron-ore sector, triggering fears of another face-off with miners.

The government, as per statements emanating from the Steel and Mines Ministries, has taken a policy stance that iron-ore should be made available to domestic steel producers at a cheaper rate to ensure steel producers' competitiveness.

To that end, the government believes checks on iron-ore pricing will be useful in countering the inflow of cheap steel products into the country.

The detailed contours of the methodology to check the current free pricing regime in the iron-ore sector are yet to be disclosed, with a government official stating that, while the "principle has been laid down, the details are in the works".

However, at least two other officials and sources in standalone mining companies say that, while a definitive cap on the selling price of iron-ore is unlikely, several other options to curb free pricing are "up for discussion by the Steel and Mines Ministries".

Other options include setting a price band within which iron prices can fluctuate or laying down a cost-plus formula, which would be mandatory for all iron-ore miners to adopt in setting their market selling price, the sources said.

In a media statement earlier this week, Steel Secretary Aruna Sharma said, “there should be some sharing of profits by iron-ore producers. We are working on the end-formula and will come up with the logic very shortly”.

Iron-ore miners have termed the government's move to check prices as "foolish".

Clearly, the battle lines are being drawn between the government and miners at a time when India is poised to record a five-year high in iron-ore production, at 180-million tonnes at the close of the current financial year on March 31.

The Federation of Indian Mineral Industries (FIMI), the representative body of miners, in a statement points out that India recently adopted the auction route for the allocation of all mineral resources.

According to FIMI, the very rationale of the auction process is based on investors putting in bids and competing to secure natural resources, and bids are based on returns assumed on the free pricing ability of the investor for the produce. Curbs on free pricing or limits to profit margins would negate the very basis of competing for natural resource allocation and would be a throwback to times when commodity prices in India were administered by the government.

An official in FIMI also pointed out that if the government’s contention was that iron-ore miners were making very high profits and needed to share it with steel producers, then it was hard to explain why steel producers seldom put in bids to secure their own iron-ore blocks, which were put up for auction, and instead complained of high domestic prices for the raw material.

As per industry estimates, in the case of steel producers with captive iron-ore sources, the cost of iron-ore constitutes about 10% of the cost of production of steel. The cost moves up to around 25% for those steel mills based on merchant purchase of the raw material.

In a submission to the government, miners said curbs on free pricing in one segment of the industry, namely raw material suppliers, and pricing freedom to another downstream player, namely steel producers, belied any economic logic.