Around this time three years ago, residents of the Bellary-Hospet region in Karnataka found waves of Chinese businessmen visiting the area. They would set out by the jeep loads to visit the region’s iron ore mines. Over 90 per cent of ore mined in the region is exported to China. Given such volumes, the Chinese were coming to negotiate supplies directly with the mine owners and bypass all middlemen.
The Hoda Committee had been set up last September by the Prime Minister’s Office (PMO) to figure out a mineral policy. Ever since the commodity boom began around 2003, the potential of the Indian mining sector became visible to all. The commodity uptick lifted prices of almost all minerals (copper, nickel, zinc, etc.). But given India’s abundant iron ore resources — 23.58 billion tonnes, according to the Indian Bureau of Mines; the steel industry believes that of this, only 13 billion tonnes are recoverable resources — it was evident that India had a lot to gain if it could commercialise its ore.
Paradoxically, the commodity boom also exposed a gap in the mineral policy. Though mining had been opened to private participation in 1993 and 100 per cent FDI allowed in 2000, the sector failed to attract investors. In the last few years, $830 million was approved, but only $38 million was invested.
The miners believe there is enough ore to satisfy both interests. So, iron can be given as a captive resource to steel companies. Equally, there is enough of the mineral that the miners can excavate and sell, either locally or overseas.
The steel makers are opposed to the idea of selling ore as it is, and argue that being a finite, natural resource that will deplete over a period of time, it needs to be value added (read converted to steel). They also say that if you export ore, you are effectively reducing the country’s raw material self sufficiency.
One of the suggestions that came up, with a few committee members backing it, was that iron ore reserves should go to the highest bidder. The Committee felt that an auction process would fetch high prices for the ore and garner states like Jharkhand, Orissa and Chhattisgarh extra revenues. Also, given that the prospecting for the mineral had been done by the Geological Survey of India, the Committee felt that an auction would more than compensate the costs incurred.
But neither the steel companies nor the states were willing to accept this. The steel companies’ stand wasn’t surprising. Besides their opposition to ore being given to miners, they also feared being outbid by miners if it came to an auction.
Till now, the states believed that while they preferred mines being given to downstream companies, they didn’t mind merchant miners bagging a few mines either. Unlike steel making, where the gestation period is high, the returns in mining are more immediately visible.
But now, the three eastern states were willing to forego returns from mining if the same mines could be used to lure steel makers. Says a senior bureaucrat: “If there is a company that is competent to mine and value add to the ore, it should be preferred. People are gainfully employed if a steel plant comes up. We are willing to forego the auction revenues as it would be more than made up through value addition.”
While nobody is willing to explain why the thinking changed, the MoUs that the three states have signed with steel makers may have played a role. According to latest estimates, the three states have signed MoUs worth Rs 2,57,200 crore (approximately $56 billion). This is four times the domestic product of all the three states combined. Now even if 10 per cent of this amount is actually invested, you are looking at something close to $5.6 billion (Rs 25,720 crore.)
There was, perhaps, yet another reason why the states demurred. “While this (the auction) would have been the most transparent and practical method to dispose of ore bodies, in the states’ case, a steady mechanism of political patronage would be lost,” says a source. (Arjun Munda, the chief minister of Jharkhand is in the thick of controversy that he gave an iron ore mine to a steel company in return for undue favours. And Karnataka chief minister H.D. Kumaraswamy’s government is facing charges of allowing illegal iron ore mining.)
Interestingly, Orissa, Jharkhand and Chhattisgarh received unprecedented support from Mahendra Jain, secretary (commerce and industries), Karnataka. Though Karnataka has plenty of iron ore, lack of water means no steel company would set up shop there. Therefore, the state’s interests should have been with the miners. However, it chose to support the cause of the downstream companies.
The Committee then discussed three possible concessions. One was to give the downstream companies the right of first refusal. The second, have two rounds of auctions — one only with downstream companies and the second without, but only if they were not in the fray for that ore body. The third was giving them a 10 per cent discount on the final auction price. These three options indicated that while the Committee was sympathetic to the cause of downstream companies, the miners still had a fair chance to stay in the reckoning.
The Hoda Committee still hoped to reconcile the interests of the miners, the steel companies (and the states). So, one suggestion mooted was that ore bodies in scheduled areas (forested areas where tribal communities live) would go gratis to downstream companies, who would develop mines there. This would address two issues. New mines would be developed and more resources generated. At the same time, the downstream player would get access to captive reserves.
Jharkhand and Chhattisgarh seemed happy with this. But Orissa appeared uncomfortable — it had less areas designated as schedule, compared to the other two. The suggestion, however, made it to the draft report.
But when the Committee regrouped in late June, there was a surprise waiting — the secretaries had returned from their state capitals with new instructions. One, they insisted on a complete waiver of the auction process for downstream companies. Two, they were not comfortable with the idea of giving downstream players scheduled areas, which would take them time and money to develop. Three, they also insisted that even for granting prospecting licences, downstream companies would be given preference over merchant miners.
The recommendation had to be finalised that very day, as the submission was overdue by six months. Till now the states (along with the steel companies) had argued why downstream companies deserved preferential treatment. But the sensitive issue of terms of captive mining and terms of iron ore exports by merchant miners hadn’t yet been resolved. Significantly, these two points were kept for the last day’s discussions so neither side would have much time to make their points.
One of the bureaucrats said that mining was nothing better than an ancillary — the actual employment came with the downstream industries (steel, etc.).
Clearly, the downstream companies were set to have things their way. (Some argue that Hoda’s belief in consensus meant they would have their way simply because there were more supporting their logic.) They now had government sanction to be preferred over merchant miners when it came to allocation of ore. They only had to demonstrate that they were going to set up a steel plant. Also, they would not have to bid for the mine; it would be handed over as captive. All they have to do is pay royalty for the ore they mine.
The miners gained some concessions. Export of ore hasn’t been banned (as the steel makers wanted). It will be reviewed in 2016, depending on the steel capacity that has been set up and ore reserves. However, unlike steel companies, they will still have to bid for ore. Also, the availability of recoverable mines is reduced since many would be on the sights of steel majors. “It’s no longer a level playing field for us,” says a miner.
SO, what is the economic logic of betting on steel? Bureaucrats from the three states answer the question in a somewhat nuanced manner. They argue that they would rather their state be seen as home to steel companies. “Steel captures the idea of being industrialised more than mining,” says one.
But for critics of the Hoda Committee report, this is its biggest weakness. Though steel has been witnessing an unprecedented boom, it is notoriously cyclical in nature. So, what happens if steel demand weakens and steel companies go slow on their plans, regardless of whatever sops the states may offer? Also, if the steel companies don’t begin operations, it is unlikely that any of the ancillary industries will come up.
Though ore demand is linked to steel demand, given that it doesn’t take as long to excavate ore as it takes to put up a steel mill, the miners feel that India still has the opportunity to capitalise on the ongoing boom. As a government official points out, now that the royalty regime on iron ore is on an ad valorem basis rather than a per tonne basis, the states earn more.
Also, India’s experience with ancillarisation has been poor. Most of the steel towns (Durgapur, Bhilai, Rourkela, etc.) have failed to create industry around them.
Moreover, some states believe that a captive mine approach is discriminatory. The West Bengal government has written to the PMO saying that as long as the ore rich states can lure steel makers, no other state stands a chance.
All this also means that India will never be able to create a Rio Tinto (Anglo-Australian) or CVRD (Brazil) in iron ore, mining MNCs that have come out of mineral rich nations.
Pallavi Roy
http://www.businessworldindia.com/issue/coverstory01.asp
