KOLKATA (miningweekly.com) – An unlimited power to tax involves, necessarily, a power to destroy; because there are limits beyond which no institution and no property can bear taxation.” – John Marshall (1755-1835)

Indian iron-ore miners could well be lamenting that the country’s fiscal managers are seemingly unfamiliar with the words of this great American jurist and statesman.

While the power to tax may not have yet killed the Indian iron-ore mining industry and writing an epitaph may be premature, the 30% export tax on iron-ore has certainly put the industry on the stretcher. And government is not yielding to demands for desperate resuscitation.

Intense lobbying and industry representations have fallen on deaf ears and, despite high expectations, all hope was dashed when, in February, government maintained the so-called ‘killer tax’ when it presented the federal Budget for the current fiscal year.

The export tax on iron-ore has been progressively increased over the years with little regard to global price trends. A levy on outward shipments was first imposed in December 2009 at 5% on iron-ore fines, and a 15% export tax on lumps followed in April 2010. A uniform rate of 20% was imposed on both lumps and fines in March 2011 and was increased to 30% in December of the same year.

The increases were effected at a time when international iron-ore prices ranged from $160/t to $170/t. Prices have since plunged to between $55/t and $56/t, cost and freight (CFR) China, for high-grade fines with an iron content of 63.5% and above, but government has resisted petitions to lower the export taxes.

“Considering the current scenario, [characterised by] restricted output from mines across the provinces of Orissa, Karnataka and Goa – owing to regulatory issues – coupled with high export duties, the future of Indian iron-ore exports remains bleak,” says Federation of India Mineral Industries (FIMI) secretary-general RK Sharma.

“The FIMI has taken up the issue for a waiver or reduction of the export duty to 5% but government has so far not acceded to the demand. The Mines Ministry is convinced of the rationale for scrapping or reducing of the tax but the Finance Ministry is not convinced.”

EXPORT VOLUMES
While the discord between the different arms of the Indian government continues, the country is becoming an increasingly less significant player in the global iron-ore trade. The Asian giant’s exports of the steelmaking ingredient declined from 117-million tons in 2009/10 to a meagre 14.42-million tons in 2013/14. During the first three quarters of 2014/15 (April to December), outward shipments were only five-million tons and the total for the full 2014/15 fiscal year is not expected to exceed seven-million tons.

Further, as a result of the high export tax, India has earned the dubious distinction of moving from a net exporter of iron-ore to a net importer. The country’s iron-ore imports for 2014/15 are expected to amount to eight-million tons, compared with estimated exports of seven-million tons.

The country’s reduced iron-ore exports have also resulted in India being displaced from the world top ten iron-ore exporting countries, with the country now trailing marginal exporters like Canada and Iran.

Ironically, the local steelmaking industry is facing a shortage of feedstock, despite the massive decline in outward shipments. Indian iron-ore fines are co-produced with lumps and constitute about 70% of total production. But consumption of fines by the domestic industry is limited; actually, 92% of the fines mined are exportable. With fines being primarily used for pelletisation or as sintering feed, the domestic requirement is only 40-million tons to 50-million tons a year, as the pelletisation technology is still in its nascence in the country, and industry analysts believe that it will take another four to five years for it to make any significant contribution to steel production.

Says Associated Chamber of Commerce and Industry (Assocham) secretary-general DS Rawat: “The Indian steel industry has no captive mines and is fully dependent on domestic merchant miners. This has caused local steel mills to be less competitive in international steel markets – the mills are facing cheap imports of steel products from China and Russia.”

Assocham has not only demanded that government maintain the 30% export tax on iron-ore, but has also suggested that an identical levy be imposed on exports of iron-ore pellets, which current do not attract an export tax.

Meanwhile, an economist associated with the Mines Ministry says the steel industry logic of linking domestic availability of iron-ore with the competitiveness of finished steel products does not stand up to scrutiny. “If that was so, why did some of the biggest steel companies like Essar and Tata Steel acquire large production capacities in countries which did not have any iron-ore or other raw material sources? What about Korea’s Posco? It is entirely import dependent for raw materials but is among the lowest-cost steel producer,” he notes.

In addition to the weakening international prices of iron-ore, domestic miners are under pressure from a plethora of hefty duties and levies, as well as a different rate of railway freight for iron-ore exports, which is 3.6 times that of domestic freight.

The royalty payable by iron-ore miners has been increased to 15% from 10 %, which is the highest in the world and compares with 2% in China and Brazil, 3% in South Africa and 2.7% or 7.5% in Australia.

“At current . . . [tax levels], we will lose money on every ton of iron-ore exported, given present international prices. Where is the margin in the export business?” asks a Goa-based iron-ore exporter, whose mine remains closed following a Supreme Court order and will only reopen after regulatory issues have been sorted out.

“Even [though some] mines are in the process of resuming operations within the next few months, I do not see any shipments to overseas markets till the export tax has been abolished,” he says.

MINING GOVERNANCE CHANGES
Further, the legislative changes to mining governance ushered in by government in March when it passed the Mines, Minerals Development and Regulation Act, 2015, will further increase the cost of mining iron-ore, since they will require miners to contribute towards a National Mineral Exploration Trust (NMET) and a District Mineral Fund (DMF).

The new legislation replaced a law passed in 1957. Besides others, it:
• will create a new category of licence – a prospecting licence-cum-mining lease – which is a two-stage concession entailing prospecting or exploring, followed by mining operations;
• permits the federal government to increase the area limits for mining beyond 10 km2 instead of providing additional leases;
• stipulates that all leases shall be granted through auction in a competitive bidding process, including e-auction;
• includes a provision in terms of which the federal government will prescribe the terms and conditions, as well as procedures, for the auctioning of licences, including parameters for the selection of bidders; for mining leases, government may reserve particular mines for specific end-uses and allow only eligible end-users to participate in the auction (but the auctions will be conducted by provincial governments);
• will increase lease periods to 50 years from the current 20 to 30 years except for coal and lignite – on expiry, the leases will be put up for auction instead of being renewed, as has been done until now;
• states that the holder of a mining lease or prospecting licence-cum-mining lease may transfer the lease to any eligible person with the approval of the provincial and federal governments; and
• provides for the setting up of a DMF and an NMET, with the former to be established by provincial governments for the benefit of persons in districts affected by mining- related operations and the latter by central government for regional and detailed mine exploration. Licensees and lease holders would pay into the DMF an amount not more than one-third of the royalty prescribed by the central government and the NMET 2% of the payable royalty.

However, according to the FIMI, auctions could prove to be a “death knell” for the iron-ore mining industry. “The auctioning of mineral resources is not a sound and economic proposition for the development of resources, as auctions completely eliminate the ability to manage the risks associated with technological innovations and the discovery of alternative mineral commodities,” Sharma says.

Making out a case against government’s move to auction iron-ore resources, the FIMI argues that auctions of a commodity are feasible only when one is sure what is being auctioned and the bidder knows what he is being offered in terms of the quantity and the quality of the product.

“How can anybody bid for reconnaissance or prospecting over an area when no one knows what it contains? “The same would be true in the case of mining leases, since nobody would know what the deposit under auction is worth in terms of the quantity and quality of the mineral,” Sharma says.

He states that no serious exploration will be undertaken and that these legislative changes will lead to unscientific mining and wastage and create opportunities for cartelisation and monopolistic practices.

But, if coal blocks could be successfully auctioned, then why not iron-ore reserves? After all, government, during the first two rounds, auctioned off 33 coal blocks, netting revenue of $32-billion, all accruable to the coal-bearing provinces.

However, the FIMI maintains that the auctioning of fuel-bearing minerals and of nonfuel minerals are not comparable. According to iron-ore miners, so far, the coal blocks that have been auctioned were operational or near-operating, having been fully explored, with the quality and quantity of the coal and available infrastructure already known.

“The bidders for coal blocks have gone in for aggressive bidding, owing to their dire need of dry fuel for operating their end-use plants as their survival was at stake,” Sharma says.

“We are not sure whether these coal end-use plants would be able to sustain the higher cost of coal in the long run, considering the fluctuating market dynamics. “Contrary to the coal scenario, the situation in the noncoal sector is quite different, as scant prospecting and exploration data is available in respect of notified minerals,” he concludes.