Govt may raise iron ore export tax, ban unlikely.

The government may again hike export taxes on iron ore, making the steelmaking raw material costlier for biggest customer China, but it is unlikely to heed domestic demands for an outright ban on international sales.

Any clampdown on ore exports by India would send shockwaves through the $88-billion international market, forcing up prices and increasing Chinese reliance on top producers Australia and Brazil.

A long-simmering debate over whether India should cash in on roaring demand for the key steelmaking raw material or save it for domestic industry flared this week when Indian media quoted a top steel ministry official as saying exports should be cut or banned.

But few in the market expect to see a blanket ban, with Delhi more inclined to raise tariffs, as the government itself benefits from ore exports, a big earner of foreign exchange that boosts the profits of state-run steel and mining firms.

"I think a blanket ban is most unlikely," said Alan Heap, an analyst at Citi.

"If taxes are increased, the most likely outcome, the impact on prices will depend on market conditions. In the past, tax increases have flowed straight through to higher prices. But in current conditions it would likely result in margin compression."

The prospect of reining in overseas sales has hit shares of Indian miners such as NMDC and Sesa Goa(SESA.BO), for fear the move would hit exports to the world's top steelmaker, China, which bought 107.3 million tonnes of Indian iron ore in 2009.

NMDC's shares have lost 38 percent of their value this year and Sesa Goa lost 17 percent, versus a gain of 2.5 percent in the benchmark index since Jan 1.

NMDC Ltd(NMDC.BO), which exports 3 million tonnes each year of India's total of about 100 million tonnes, doubled its export price for the June quarter to $120-$140.

For a graphic on India's iron ore exports click, click here

LAST TAX RISE IGNITED PRICE SURGE

Tax rises at the end of last year triggered an explosion in iron ore prices, which surged 70 percent from around $109 in late December to $185 in April, far in excess of the duty increase of 5 percentage points. Since then prices have fallen back below $120.

The government usually raises a tax on exports when prices are high but it also cuts the tax when the situation changes.

The government would need to weigh up the views of the mines ministry, which opposes the ban, and the steel ministry, which favours it, as well as the finance and trade ministries before taking a decision.

"If you take that spot supply out of the equation the market would move into a very steep backwardation. But they aren't going to do it," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.

"There is an argument they should think like a sovereign wealth fund and bank commodities by keeping them in the ground, but the government is also making a lot of money from these exports."

Within the country, miners anxious to keep markets open are ranged against steelmakers keen to ensure supply of raw materials and reduce competition for Indian ore.

"There should be no ban on iron ore exports," said Glenn Kalvampara, secretary of the Goa Mineral Ore Exporters' Association.

"This is a major industry and a number of people are dependent on it. Plus there is no demand for low-grade ores for domestic requirement."

Miners say they export mostly low-grade ores and fines to China, where steel firms blend it with superior raw material, while in India, steel firms mainly use high-grade ore, making export curbs unnecessary.

India produced 226 million tonnes of iron ore in the year to March 2010, nearly half of which was exported, mostly to China, making overseas sales a key factor in the profitability of the country's 316 mines and the livelihoods of their employees.

India's mines ministry is adamant against banning iron ore exports, supporting the cause of miners, including state-run NMDC Ltd, which it controls.

But the steel ministry, which controls such firms as the Steel Authority of India Ltd, voices the concerns of metal firms, among them private companies such as Tata Steel(TISC.BO), Essar Steel and JSW Steel(JSTL.BO).

Steel makers say it is far more profitable for India to export steel rather than raw material, particularly as local iron ore demand would rise in step with steel plant expansions.

India's steel output is likely to more than double to 120.6 million tonnes by the year to March 2012 from 55.1 million tonnes last year, the country's steel ministry estimates, still well short of China's more than 600 million tonnes currently.

Based on planned projects, capacity could go up to 293 million tonnes by 2020, or more than five times the current figure, sharply raising domestic ore demand.

Prakash Tatia, president of marketing with sponge iron producer Welspun Maxsteel Ltd, said the firm supported the ban on ore exports because higher prices would hurt its expansion plans.

"We face both issues -- availability of iron ore and prices of iron ore," he said. "Availability because long term assurance of supply is not there. Pricing because, if iron ore is given to us at international prices, we will lose our competitive edge."

An iron ore ban would throw the spot market into confusion.

"China is pretty much the only buyer of Indian ore," said David Tucker, managing consultant at Hatch Beddows.

"And such a ban puts the whole spot market in jeopardy because the index prices are predominantly based on spot Indian cargoes; it makes all of that look very rocky."

Source : Reuters