Don’t ban iron ore exports

Should iron ore exports be banned? No.

Should an export tax be levied on iron ore? No.

Should the royalty on ore be raised? Yes, hugely.

Should iron ore exploration be opened to the private sector and FDI? Absolutely?

Should ore deposits be allotted or auctioned? Auctioned, of course.

Should auctions be waived and allotments made to companies putting up steel plants in the same state? No.

That, I think, sums up the policy we should have on iron ore. The Hoda Committee on mineral exports has suggested most, though not all the above measures. Leftists and the steel industry have, however, called for a ban on high-grade ore exports.

Leftist parties and Steel Minister Ram Vilas Paswan suffer from the illusion that the wealth of a country lies in its mineral deposits, which should therefore be conserved and not sold to foreigners. The steel industry wants a ban on iron ore exports for different, self-serving reasons.

The notion that a nation’s wealth lies in its minerals is widespread but wrong. Africa overflows with oil, diamonds, copper, and other minerals. Yet, with few exceptions, mineral-rich countries in Africa (including Nigeria, the biggest oil producer) are miserably poor. By contrast, the richest developing countries are large rocks in the ocean with no minerals at all—Singapore and Hong Kong. They are rich because they have skills and productivity, and that constitutes the real wealth of any country. Minerals count for little. The only exceptions are countries with small populations but huge oil deposits: the rulers there can steal half the oil and still have enough left to distribute to ordinary folk.

In Africa, mineral wealth is highly correlated with corruption, poverty and slow growth. Mineral wealth creates a rush to divide the spoils, and to neglect productivity and skills. I am amazed that the left is unable to see this.

The lowest-cost steel producer in the world is POSCO of Korea. It imports iron ore from India and coal from Australia, yet produces steel more cheaply than India or Australia. How? Through higher productivity. Our policies should aim at enhancing productivity, not gifting unearned windfalls to steel companies.

J. Mehra, Director of Essar Steel, argues that the only advantage Indian steel companies have is access to cheap iron ore, and if this is exported to competitors, then India will be committing hara-kiri. Really? Then how come Tata Steel and Mittal Steel are buying steel plants the world over, most of which have no local iron ore? Why is Essar Steel itself scouting for foreign acquisitions?

Brazil and Australia export steel, but are also the two biggest iron ore exporters in the world. Why don’t they stop exporting to their competitors, and conserve ore for their own steel plants? Are they stupid idiots committing hara-kiri? No, they are countries where common sense prevails over vested interests and mineral illusions.

But, say steel-makers, our iron ore reserves are limited and should be conserved. Of our 24 billion tones of proven reserves, some cannot be exploited: mining is banned in ecologically sensitive areas of the Western Ghats. So, India’s reserves may last no more than 30-35 years.

Nonsense, says Ajit Ranade, Chief Economist of the AV Birla group, an ore exporter. Indian ore reserves will last 140 years at today’s rate of extraction. Surely the rate of extraction will rise rapidly in coming years? Yes, says Ranade, but if the government monopoly on prospecting ends and private and foreign companies are allowed in, enormous new reserves will be found. In Australia, reserves went up 100 times with appropriate incentives. I think there is a watertight case for opening up this area.

Steel producers want ore conserved for conversion to steel, since that will increase value added hugely. Ranade pertinently asks, should we ban the export of software, which is an input for foreigners, and use it only for value addition within India? In any case, steel itself is an intermediate product, an input for cars and ships. So, to increase value added, why not ban the export of steel and export only cars and ships? I have a feeling that at this point the steel industry will suddenly lose interest in the value added argument.

Iron ore prices have skyrocketed. Instead of letting exporters keep the windfall profit, why not mop up part of it through an export duty? I agree that the windfall needs to be shared. But this is best done by raising the royalty on iron ore hugely, and making it an ad valorem rate linked to the export price, regardless of whether the ore is exported or used domestically. An export duty will discriminate against exports and enrich the centre. Better is a steep royalty increase, which will maintain a level playing field between exports and domestic use. A high royalty will channel the windfall to state governments, who need to spend far more on rehabilitating people displaced by mines. That will be a fairer sharing of windfalls.

Some but not all steel companies have been allotted captive mines, and this is unfair. Tata Steel, with its captive mines, has an unfair advantage over Essar Steel or Ispat Industries. Reserves should be auctioned to the highest bidder, not allotted to favourites amidst charges—often justified—of crony capitalism.

Mining companies should be able to bid on par with steel companies. Australia and Brazil would consider it unthinkable to prohibit their mining companies, BHP-Billiton and CVRD respectively, from bidding for new mines. Only in India is the steel lobby powerful enough to propose the unthinkable.

Finally, states like Orissa must be stopped from allotting mines only to companies setting up steel plants in the same state. This is hostile discrimination against steelmakers in other states. India must not be broken up into small pockets of internal protectionism. Let us have one India, please. Let mines be auctioned to the highest bidder, regardless which state the bidder comes from and where the ore will finally go.

 

What do you think?