Ajoy K Das

Kolkata: China has threatened a sharp reduction in iron ore orders unless Indian exporters shift to contract supplies from the prevalent spot rate basis.

According to the China Iron and Steel Association, Chinese steel producers lost $830 million last year on account of volatile spot market rates for Indian ore, which is often pegged higher than benchmark contract rates settled between Chinese steel companies and ore suppliers in Australia and Brazil.

The demand for supplies at pre-negotiated rates comes just as the government has announced a package to cool steel prices.

The package, though, ignores the steel ministry’s proposals for imposition of ad valorem export tax on ore and a cut in excise duty on finished steel.

Notably, at the inter-ministerial meetings on steel prices, the commerce ministry had opposed any levy on ore exports fearing it would jeopardize the $200 billion export target set for the current year.

The Chinese demand could well seal the case against any fresh levy on iron ore exports in the near future.

Senior steel ministry officials said the Chinese insistence on contract rates has added to the scare in the government that any fresh fiscal disincentives at this juncture would hasten the exit of Chinese ore buyers, leading to exports drying up, private miners closing operations and large-scale unemployment that could have political ramifications.

After all, ore exports is a whopping Rs 55,000 crore business.

Interestingly, Chinese steel companies are yet to sign ore supply contracts for this year with Australian and Brazilian miners, who have proposed a 65% increase in prices.

Steel industry sources said the Chinese steel companies may be trying to gain a leverage in their negotiations with Australian and Brazilian companies by seeking contract supplies from India. China meets around 60% of its ore requirement through contract supplies from miners like BHP Billition, Rio Tinto and Vale. The balance 40% is sourced from the spot market.

Indian exports of ore amount to around 90-100 million tonnes per annum, 80% of which is shipped to China, almost entirely on spot rates, given the fragmented nature of private mining companies in the country.

It is also not clear how Chinese steel companies can negotiate contract supplies with Indian miners, who do not have the size of operation to meet the quantities required, unless such a contract is negotiated with a consortium of miners.

Somewhat predictably, therefore, the Union commerce ministry has responded that India cannot set any benchmark contract rates with just 15% market share in China as international mining companies with far greater market share can.

Source : DNA