Economic patriotism hurts

The finance ministry has imposed an export duty of Rs.300 per tonne on iron-ores.The move is likely to hit the mining industry hard.Exports are likely to fall by about 30-40%.Still unsatisfied , the steel associations want it to be capped at 90 million tonnes per year, with a lowering of cap by 15% every year and eventually a complete phase-out of ore exports by 2011.

The reasons being stated are the iron-ore is limited and should be conserved for the use of domestic steel companies.They project that low-cost iron-ore will be available to the companies which will result in increased production.This will go a long way in the massive infrastructure requirements needed for the country.While this may seem to reason sufficient enough for the move , one might question the fairness as well as efficacy of the policy.

While we can envision the great benefits that the steel companies will probably get, the mining industry is being ignored.One has to understand the losses that the miners would have to burden resulting in massive unemployment - more than 100,000 people employed directly or indirectly in the industry.The bigger miners are likely to withstand these shocks but the moderate and small ones would be put out of business.The state likely to be hit hardest is Goa.In addition it is likely to affect the allied industries like transportation.Iron ore accounts for almost 80% of the total traffic in the Mormugao Port.Such indirect effects have been conveniently disregarded.

And there are doubts as to whether this is effective as well.Low-grade iron ore fines are powdery and have to be processed into pellets before they can be used by steel plants. Most of the domestic steel makers only use big, lumpy ore that do not have to be converted into pellets as they save on costs.
An excerpt from an article in Business Standard-

On an average in iron ore production, 40 per cent is lumps and 60 per cent fines. Further, for supplying calibrated iron ore to all domestic sponge and pig iron plants, lumps have to be crushed to bring them to the specified size, which generated more fines. Indian steel makers do not have sufficient processing capacity to use low and medium grade iron ore-i.e fines that constitute the bulk of exports.

What this means is that miners will end up stocking fines which the steel companies dont want.In addition,as production is discouraged, supply of lumps will be less which will increase prices.Lower margins will also mean less exploration thereby further aggravating the problem.

While moderately efficient miners will be driven out of business or suffer losses(for no fault of their own),somewhat inefficient steel producers will stay in business just because of this move.The negative impact on miners will be more than the positive impact on steel companies.Thus, we have a net loss of efficiency and production.Also one can't guarantee that Indian steel companies would use it only for domestic purposes and not export it.

In addition the policy degrades India's reputation in the export market.China, which is the largest importer of Indian iron-ore will turn to better priced sources like Australia and Brazil.China will most probably enter into long-term agreements with them which is a huge loss to Indian export.Though not exactly in retaliation, China has planned to levy duty on coke imported in large quantities by Indian steel companies.This will hurt them as much as the ore duty hurts Chinese steel makers.

Studies show that we will be depleted of iron ore even if we don't export iron - just by domestic demand.The possible shortage of ore should in fact act as a signal to the industry to search for alternatives.Price signals are specifically meant for this purpose.India's steel companies should try to be competitive with respect to foreign ones.But better performance instead of lobbying is desired.

Robbing Peter to pay Paul is a flawed policy.More so when Peter loses more than what Paul gains.