Profitability of iron ore exporters like Anil Agarwal-promoted Sesa Goa is under threat again, with the Union government hiking iron ore export duty to 30%, utilising the provision in the Union Budget 2011-12.

In the Budget, the government had increased the export duty on both iron ore fines and lumps to 20%. Following the hike in duty, iron ore exports had dropped by 25.2% to 35.4 million tonne during April-October 2011, according to industry estimates. Profits of the country?s largest iron ore exporter also took a hit in the first half of the fiscal. Sesa Goa?s profits for the first half dropped 50% to R842 crore. The company?s sales of iron ore also dropped by 13.5% during the first half and it sold only 5.80 million tonne.

Analysts expect Sesa Goa to suffer more following the latest hike in iron ore export duty. ?While Sesa Goa?s profits are expected to be affected adversely,? said Angel Broking in a report released on Tuesday. ?We do not expect any impact on NMDC?s financials as we do not expect any export of iron ore by NMDC during FY2012 and FY2013.? The report also adds that the company generates almost 90% of its net sales from exports and an increase in export duty costs will not be matched by an increase in iron ore prices.

Steel makers hailed the government move. ?It is a good move,? said Amit Agarwal, chief financial officer, Essar Steel India. ?Why should India sell iron ore at cheap rates? Indian steel makers need iron ore and it is much better to add value to the iron ore in India and export the finished product.? In 2008, China had similarly banned export of coal to preserve the natural resource for its internal consumption. ?It is unlikely that iron ore exporting companies can pass on this export duty to customers as iron ore prices are determined primarily in the Chinese market and Indian share of Chinese imports is less than 20%,? said Pallav Agarwal, an analyst with Karvy Stock Broking.

?Rupee depreciation to 53 levels would cushion the impact of the duty hike marginally.?

?The duty is unlikely to have an impact on domestic steel companies materially,? said an official from an iron ore exporting company. He did not wish to be quoted in the story. ?The move will only harm the mining industry further and its very bad news to start of the year after every decision went against us in 2011.? Bank of America Merill Lynch analysts concur with view that iron ore prices are unlikely to increase.

?Given that global macro-economic conditions have been worsening and uncertainty over the Chinese economy persist, we have cut our iron ore price estimates by $10/tonne, to $150/tonne, in 2012 and $5/tonne to $145/tonne in 2013,? they said in a report released on December 2.

?In the immediate short term, volatility could remain high, with prices potentially retesting recent lows, suggesting scope for a price drop to $120/tonne from around $133.5/tonne at present.?