Iron ore: it's a steal

By R.N.Bhaskar

April 2008 (published in the DNA).

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Is the country living a hand to mouth existence for the next five to ten years, or is it planning to remain in the reckoning for much longer?

Will the government allocate iron ore mines to manufacturers, or to merchant exporters? Will it encourage steel production by ensuring that export or iron ore becomes unattractive?

Unlike Brazil and Australia which are blessed with huge land areas with scant populations, and can hence continue exporting ores and minerals, India needs to consume the iron ore itself.

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A new minister has been appointed for mines. And a new minister of state will now be looking after steel. That has, once again, filled the hearts of steel producers with hope, and fear. Hope that its demand for captive iron ore mines will finally be granted; and fear because they see a grave danger for the industry if iron ore exports are allowed to continue like before.

At the heart of the entire fear and expectation is the basic question – is the country living a hand to mouth existence for the next five to ten years, or is it planning to remain in the reckoning for much longer? This is because India's policy of allowing companies to export iron ore made sense in the past, when India needed every bit of foreign exchange, and selling iron ore was one of the easy ways to achieve this.

But, with India consuming 53 million tonnes of steel annually, and slated to consume 100 million tonnes of this metal in less than five years' more, a clear policy decision needs to be taken whether India should export iron ore, or encourage steel producers to use it for the manufacture of steel within India. Of course, there is one alternative. India can sell the iron ore, and then pay higher prices for the import of both iron ore and steel at a later date. The prices are obviously bound to soar, because iron ore prices have been climbing – by almost 50% last year -- thanks to the surging demand from both China and India. Obviously, if India's steel producers have their own iron ore, it will mean importing that much less iron ore and steel, both of which are bound to become more expensive in the coming years.

Taking a decision will not be easy. There are companies like Sesa Goa which have specialised in exporting iron ore. And there are players like the Mittals of Arcelore-Ispat who also want to own iron ore mines in India, ostensibly for setting up a captive steel plant in India, but could also export the same to feed his overseas steel plants.

To appreciate how serious the situation is, one needs to look at two factors. First, we need to determine the size of iron ore reserves in India, and simultaneously also look at the quantities India exports. Second, to determine the quantity of iron ore India's steel producers will require.

Take the iron ore reserves first. As on April 1, 2005, iron ore resources in the country have been estimated to be 25 billion tonnes largely distributed over six states(table 1). Now look at how much iron ore is produced annually, and how much of it gets exported (table 2)

Distribution of iron ore reserves
State	% of reserves
Karnataka	39
Orissa	18
Chhatisgarh	10
Goa	3
Jharkhand	14
Andhra Pradesh	6
Others	10
Total iron ore reserves (million tonnes)	25,000

Iron oreproduction grows; but exports surge faster (figures in million tonnes)
Year	Production	Exports	% exported
2000-01	80.76	37.49	46.42
2001-02	86.23	41.64	48.29
2002-03	99.07	48.02	48.47
2003-04	120.6	62.65	43.9
2004-05	142.71	78.14	54.75
2005-06	154.43	89.27	57.81
2006-07*	172	105	51.9
Note: () Industry estimate*

<>Now comes the second factor. How much iron ore does the steel industry require? For making each tonne of hot metal, the industry requires 1.6 tonnes of processed iron ore or 2 tonnes of run of the mine output. At 53 million tonnes, the industry currently requires around 106 million tonnes of iron ore. That would not be worrisome except for the fact that India's production has jumped from 25 million tonnes to 53 million tonnes only during the past decade. Earlier, thanks to a closed-door policy, demand for steel was kept suppressed hence was low. But with industrialisation, this demand has to go up. India's per capital consumption of steel is just 40 kg. Compare this against 250 kg for China and over 350 kg for developed economies (world average: 140 kg, please refer to Chart on Per Capital Steel Consumption),

With greater focus on infrastructure, and with more vehicles and cities emerging, India's demand could increase by at least four times over the next two decades. Not surprisingly, the industry expects steel production to cross 100 million tonnes (that is almost double current levels) by 2012. That will require 200 million tonnes of iron ore, or just 100 years of supply. Within two decades, India's steel consumption should cross 200 million, requiring 400 million tonnes of iron ore, leaving it with just 50 years' supply.

India's ability to produce more steel, and competitively, will depend on the government's mining policy. Will it allocate iron ore mines to steel manufacturers, or to merchant exporters? Will it encourage steel production by ensuring that export or iron ore becomes unattractive? This is extremely critical because the world's raw material supplies are getting scarce, and China has been going around the world securing iron ore supply for the future. Unlike Brazil and Australia which are blessed with huge land areas with scant populations, and can hence continue exporting ores and minerals, India needs to consume the iron ore itself.

Will the new mining policy benefit the steel industry? Or will it favour merchant exporters. That is the question which will decide the long-term fortunes of the steel industry in India.