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Tuesday, Jul 26, 2005

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To export or not?

AFTER A PERIOD of phenomenal growth, driven primarily by China's appetite, world supplies of steel now exceed demand, leading to a fall in prices. Between March and June, the market fell 20-35 per cent, even as the early-July recovery has been short-lived. Steel fundamentals have gradually deteriorated, much to the discomfiture of exporters, especially of iron ore. Experts do not see a marked price recovery as mills have enough stock and buyers are aware of this. Indeed, steel production cuts have begun in many parts of the world; not in China as yet, though the pace of its steel production will surely slow in the coming months. Spot iron ore prices continue to decline gradually. By early July, the delivered cost of `63.5 per cent fe' Indian iron ore had fallen to around $42 a tonne free-on-board or $53 delivered (including freight of $11/tonne) in China, 45 per cent below the March highs.

Falling prices and slowing demand have prompted a review of India's iron ore export policy. There is pressure on policy-makers from steel producers to ensure iron ore availability at reasonable prices, leading to demands for a cap on iron ore exports. But exporters want to ride the world market boom. Exports from the country have been growing at a scorching pace in recent years. From worth $428 million in 2001-02, iron ore exports doubled to $870 million the following year, followed by a 33 per cent rise to $1.13 billion in 2003-04. In 2004-05, exports once again more than doubled to $2.63 billion. Interestingly, China's share has risen to nearly 80 per cent from about 50 per cent a couple of years ago, with Japan and Korea following at a distance. With domestic steel demand poised for a leap, spurred by robust economic growth, the desirability of unlimited iron ore exports has become the focus of attention. As iron ore reserves are strategic to domestic growth, any review of the iron ore export policy must consider not only the current supply-demand fundamentals both within and outside the country, but also the expected changes. The domestic steel requirement (and the demand for iron ore) to meet the boom in construction and the series of infrastructure projects in the pipeline must be well estimated.

The policy-makers are in the unenviable position of having to reconcile the conflicting interests of iron ore exporters and steel-makers at home. They know that the country's iron ore supplies are not unlimited and that the material is critical for rapid economic growth. Equally, they cannot also ignore the current export potential or take precipitate steps to curb shipments. More so when India would need to invest upwards of Rs 1,50,000 crore in steel-making capacity to use up the quantity of iron ore the country now exports. Mobilising sums of this order is not going to be easy and even if the Indian steel industry manages to do so, marketing the additional 50 million tonnes of steel thus produced would be doubly difficult. Clearly setting out broad parameters in terms of domestic requirements, prices and export volumes would help players plan their business more scientifically and save them from knee-jerk official diktats.

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