Why treat iron ore differently from coal?

The Indian government has recently approved the auction of coal blocks for captive use. The bill is likely to be placed in Parliament in the upcoming budget session, proposing amendments to the Mines and Minerals (Development and Regulation) Act, 1957. This is a welcome move as it will bring objectivity and transparency in allocation of the coal resources. Besides, it will also help the central and state governments optimise their revenues. The question is why the government doesn?t consider adopting the same process for allocating captive iron ore mines to user industries like steel manufacturing.

The government has been regulating prices of key mineral resources like gas and coal for supply to sectors like fertilisers and power, where output is subsidised. While the country is gradually moving towards market-based pricing for these resources, natural resources like iron ore are still being harnessed by user industries at below market price. The government can correct this anomaly by formulating a common pricing policy for all natural resources.

The government might as well replicate the production sharing contract (PSC) model for the sharing of petroleum profit from the upstream oil and gas sector for coal and iron sectors. The government was initially allocating oil and gas acreages to public sector companies like ONGC and OIL on a nomination basis. Later, in a bid to attract private investment to the sector, the government switched over to the PSC model that helped it expedite exploration programmes and increase revenues.

Currently, the government is also allocating captive coal mines to project developers in key sectors like power, cement and steel. Coal cost for captive mines is much lower in comparison to long-term fuel linkage. While developers get assured supply of coal, electricity consumers get the benefit of reduced coal prices in the form of lower tariffs. So the policy is beneficial to all stakeholders. However, allocation of captive blocks is nothing but policy ad hocism. The government must amend existing legislation to allow entry of private players in coal mining if it wants to expedite domestic production.

Meanwhile, state governments ?which are entitled to 20% of royalty on production from onland oil blocks?receive only 10% royalty from iron ore mines. While the central government imposes cess on crude oil production, there is no such tax payable by iron ore miners. This is despite the fact that the cost of producing oil and gas is much higher than that of mining iron ore. The anomaly is due to the fact that the domestic iron ore mining industry continues to operate under a nomination dispensation, unlike the oil and gas sector where bidding is the only route for acquiring acreages.

For example, the government has allocated captive iron ore mines to key steel manufacturers like Tata Steel and Steel Authority of India Ltd (SAIL) on a first come, first serve basis. These companies get a supply of iron ore from captive mines at dirt cheap prices even though they are free to sell their products at market prices.

SAIL has captive mines with the capacity to produce 25 million tonne (mt) of iron ore a year while production capacity of captive mines allocated to Tata Steel is 10 mt. The cost of production for SAIL during 2007-09 was Rs 770-781 per tonne while for Tata Steel it was Rs 513-528 per tonne. By contrast, the average free-on-board (FOB) price for the export of iron ore from India during the same period was in the range of $60-65 per tonne.

Industry experts say that the cost of captive mining cannot exceed Rs 500 per tonne under normal circumstances. Only in an exceptional situation?where overburden is very high and mining is at a depth of more than 50 metres?can the production cost be higher. So, it is likely that captive iron ore miners are also adding the cost of transportation to steel plants in their total cost of production. Internationally, transportation charges account for a large chunk of iron ore prices.

It is true that the allocation of captive mines helps manufacturers ensure an uninterrupted supply of raw materials to steel plants, besides lower costs. But the benefits of the reduced iron ore costs cannot be passed on to consumers as steel prices are not being regulated by the government. Besides, this also provides an undue advantage over producers sourcing raw materials from the market. The government is already providing a fair amount of protection to the industry against import competition. There is no reason why it should subsidise raw materials as well.

The government is also planning to allocate captive mines for steel plants envisaged by multinational companies like Korea?s Posco in Orissa and ArcelorMittal in Jharkhand. India is a big market for steel manufacturers. Since per capita steel consumption in India is still much lower compared to developed countries, domestic demand is expected to rise in the future. So if these companies finally set up plants here, they would have a huge market for their products. The government does not need to offer any additional sops like captive mines to attract foreign investment.

Allocation of captive mines to developers cannot be a long-term policy to encourage domestic production of mineral resources. Instead, the government should seriously consider amending its policy to encourage development of various mineral sectors as independent industries. As an interim measure, it might as well think of auctioning iron ore blocks just as it is planning to do in the case of captive coal blocks. This would help states raise their revenues.