It was not unexpected. Royalty on minerals were to be raised and brought to ad valorem rates. The rates were abysmally low and there were good reasons for changing them. But, the change to 10% ad valorem rate for iron ore has not gone down very well within the industry.
The royalty rate should have been increased, but, at specific rates. After all, the existing system has worked so far well, except for the fact that the rates were abysmally low. The government could have brought in a system of annual revision of the rates depending on the market price of iron ore if it was keen to keep the royalty in tune with the market price.
While nobody should be happier paying more in taxes, the decision has not come at a very comfortable time for the industry. Also, implementation of the new measure will be hard, confusing to the core and chaotic everywhere when the iron ore market is not homogeneous and competitive to offer a clear base price on which the rate is to be applied. Iron ore has different markets depending on how it is transacted and valued. There is one price for exports and another for the domestic buyers. Those who mine for captive use have a different valuation for the same in their balance sheets. There are many grades and technical specifications offering different values to the buyers leading to a wide band of prices.
The Indian Bureau of Mines will certainly find it challenging to find a solution to the problem. It will be difficult to make all happy. Economics for different players in the industry will change. The industry will spend more time fighting issues and anomalies from now. This time, even those with captive mines will get adversely hit.
The decision has come at a time when the global iron ore market has not really recovered to any reasonably comfortable position. The iron ore prices from India for exports have recently increased due to strong rise in steel production in China as also the hike in the ocean freight rates. The higher ocean freight provides an advantage to the Indian iron ore exporters to the extent of the differential between the freight from Brazil and India into China.
However, the ocean freight has dropped again after a spurt for a while. There are questions whether the Chinese mills will be able to maintain the current production levels into the months ahead. There is a suspicion that Chinese economic growth is actually slowing down and the official figures are fake. They have also struck a 16 million tonne annual supply contract with Fortescue of Australia at a slightly lower price than what they are paying others for currently. Increased supplies from Australia will dampen the exports business from India as prices will fall. Australia has a freight advantage over India. The Chinese steel companies have taken stakes in several significant iron ore companies in Australia and one can expect, in the days ahead, more volumes to touch the Chinese shores. This will jeopardise the Indian iron ore export prices and the negotiating positions of the highly fragmented Indian miners.