In recent times relations between the steel and mines ministry have not been cordial. The reasons are obvious. While the former espouses the cause of the steel companies believing that it would benefit the steel sector, the latter bats for the miners. Since iron ore is the key raw material for steel manufacturers (1.5 tonne of iron ore is required to make 1 tonne of steel), they ideally want a situation where they are in a position to control its prices, whereas the iron ore miners feel that they have a right to command market prices for their products. Any kind of relationship that is so mutually dependent would obviously create tensions if the ministries governing them happen to fall in the domain of different ministers.

For long the steel and mines ministry used to be headed by the same minister so such tensions were absent. However, the compulsions of coalition politics in recent times broke the practice. So one often reads that while the steel minister keeps saying that iron ore exports should be banned and natural resources should be conserved, the mines minister explains how there?s no problem with exports.

This routine scramble between the two sides now threatens to derail the government?s efforts to bring in a law that mandates mining companies to share 26% of their profits with backward and tribal people of the mines region who are displaced because of such projects. The first ones to raise the discordant voice have been state-owned steel firm Steel Authority of India Ltd and the private sector Tata Steel. The steel minister Virbhadra Singh has also supported them. The objection of these two companies and the minister is mainly because SAIL and Tata Steel have captive iron ore mines that feed their steel manufacturing plants. If the 26% profit sharing proposal becomes a law, it would apply to all prospective mining leases as well as the existing ones. This would mean that SAIL and Tata Steel would have to hive off their iron ore mines into separate companies.

Ideally, there should be no problem with this. Companies in most other sectors are hiving off certain activities that are not core to unlock value, so why can?t the same be done by the two steel firms? The problem here is that any such step would change the dynamics of steel making, its efficiency and product pricing. Currently, these two steel producers source 100% of iron ore from their captive mines. Another major producer, JSW steel, sources around 10% but manufacturers like, say, Essar Steel or Ispat don?t have the same luxury. Iron ore prices are volatile and determine steel prices. Companies like SAIL or Tata Steel sell their products at the same price in the market as Essar or Ispat would but are protected from the swings in prices of iron ore. This is not all, the government policy allows captive iron ore miners to export the product after meeting their domestic requirements. Simply put, a steel company having iron ore mines has the luxury of exporting iron ore if its price in the international market is higher than that of steel!

This explains why post-2005 there has been a rush by a host of steel companies for mining leases in Orissa and to some extent Jharkhand. The advantage the combined status offers has made the state-owned iron ore producer NMDC also think in terms of setting up a steel plant. If it supplies iron ore to other steel producers why not set up its own steel unit goes the logic.

There?s another area where the mines ministry has hurt the steel ministry/industry hard. The proposal on changes in mining law also mandates that future mining leases be given on the basis of competitive bids.

Today SAIL has captive mines and meets its requirement of 24 million tonnes in a year through it. But the company is expanding and would require 35-40 MT by 2012-13. Obviously it cannot risk its raw material supplies to any bids. The steel minister wants first the requirements of public sector units to be met and then only leases to be given to private producers because, after all, it is the government?s money that is invested in PSUs.

So, left to the steel minister, any law made by the government on profit sharing or mining leases through competitive bids should exempt the companies he wants. Who says socialism is dead!

?rishi.raj@expressindia.com