A price slump in the global market for iron ore has thwarted a quick fix that could have given India’s economy a boost.
Until three years ago, India was the world’s third-largest exporter of iron ore. Mines in the picturesque western state of Goa supplied nearly half of those exports, employing more than 100,000 people, and generating more revenue for the local economy than even the tourists who flock to its famous sandy beaches.
But the previous Indian government halted iron-ore mining because of concerns about illegal operations and the environment. Prime Minister Narendra Modi’s government set about restarting mining, but by the time it cleared the final obstacle last month for a majority of the mines, prices had collapsed.
The price of iron ore similar to that mined in Goa has slumped to around $42 a ton at China’s Tianjin Port, from a high of $165 a ton in 2011, according to the Steel Index website.
“The [industry's] economics don’t exist anymore,” says Ambar Timblo, managing director of Fomento Resources, one of Goa’s leading mining companies. He estimates Goa’s mining industry has lost nearly $20 billion in potential revenue since the state’s mines were suspended from operating.
That has left people such as Raju Juggal and his partner Sunil Mesta struggling to pay debts they took on five years ago to buy a boat to transport iron ore. “I want to sell my vessel as scrap because there are no takers,” says Mr. Juggal. “But the banks won’t let us, as they say the scrap value is too low to cover our loans.”
Two things happened while India’s iron-ore industry was shut down. China’s demand slowed and the world’s two mining behemoths, Australia’s Rio Tinto PLC and BHP Billiton PLC, along with Brazil’s Vale S.A., boosted supply in a price war that may have permanently crippled India’s iron-ore industry.
The three companies, which together produce around 60% of the world’s iron-ore exports, are betting they will remain profitable because their size and technological advantages enable them to keep mining costs low. Rio, for example, ships a ton of iron ore from its vast mines in the Pilbara region of Western Australia to China at just above $30 a ton, including various government royalties, according to analysts.
Moreover, because Rio’s ore is higher quality than that mined in Goa, it sells for around $49 a ton.
By contrast, it costs Goan miners on average around $40 to $42 a ton to produce their lower-quality ore and to get it to a local port, Mr. Timblo says, including various government levies. When they ship the ore, they must then pay a 30% export tax, first imposed on Indian miners four years ago when the commodities boom was at its height.
Add in shipping costs, and Goan mine operators need to sell iron ore at around $55 a ton to break even, Mr. Timblo estimates — some 30% higher than current prices.
“The largest cost aspect to Goa is statutory in nature through royalties, contribution to iron-ore funds and of course the 30% export duty,” says Mr. Timblo. “So it is more or less in the government’s hand to appropriate these costs and taxes in a judicious manner to ensure exports can be competitive.”
“Nearly all the households in our village are on the verge of collapse as most are dependent on mining,” says Devanand Vasant Parab, head of the council in Pisseurlem, one of the hill villages in Goa that used to provide mining workers.
“We know that market rates have crashed to such a level that mines won’t restart,” he says.
Around three-quarters of those employed directly or indirectly in Goan iron-ore mining at its height are now unemployed, says Glenn Kalvampara, secretary of the Goa Mineral Ore Exporters Association, the trade body that represents local ore exporters.
“The rest were retained in the hope that mining would start sooner than later, despite there being no mining income,” says Mr. Kalvampara. “Now there seems to be no end.”
Iron-ore mining in Goa, a former Portuguese colony, took off following World War II, when Japanese buyers were scouting for reliable suppliers to aid the country’s reconstruction efforts.
Source:blogs.wsj.com
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