A case for lower rail freight rates

Iron ore mining in India seems to be at the crossroads today. Many mines remain closed, throwing thousands of workers out of jobs.

The road transportation of ore has come down drastically, giving rise to fears of widespread default in repayment of loans taken to finance the purchase of thousands of trucks. The tortuous enforcement of various regulations makes transport of ore to railway sidings extremely cumbersome.

Accumulation of iron ore fines poses serious constraints to mining operations. High freight on iron exports makes export of iron ore fines a losing proposition for the miners.

Yet the Odisha Government is of the view that the iron ore industry is making super-normal profits on a scale unheard of in any other industry. Since this view about ‘high profit' is in the context of the export of iron ore fines, the issue calls for informed analysis.

The change in the international ore scene has also impacted the Indian iron ore mining industry. Prices have fallen drastically. For example, the fob price of iron-ore fines (Fe-63/62) fell from $156 on September 30, 2011 to $121 on November 30.

The price of fines (Fe 61/60) declined from $144 to $110 during the same period. The fall is 22 per cent for Fe 63/62 and 24 per cent for Fe 61/60.

The slowdown in China's demand and aggressive arrival of Australian and Brazilian ore in the international market on a spot basis are responsible for huge inventory and consequential fall in prices. Consequently, miners in Odisha are now incurring a loss in export of iron ore fines.

Low realisation

For example, price realisation per tonne of fines of Fe-63/62 on September 30, 2011 was Rs 7,739 ( $156).

It came down to Rs 6,323 ($121) on November 30. Railway freight for movement from Jaroli to Haldia is Rs 2,953 (47 per cent of the realisation of Rs 6,323).

After including export duty of 20 per cent; moisture loss of 8.5 per cent; port operation cost of 15 per cent and royalty of 10 per cent, the loss was Rs 729 per tonne on November 30, whereas there was a net profit of Rs 310 on September 30, when the realisation was $156 per tonne.

For lower-grade fines, the loss is even more. Except for iron ore fines of 63/62 per cent Fe, exported from Jaroli railway station through Paradip and Visakhapatnam ports, where there is a nominal profit, export of fines from all other stations in the eastern sector results in loss.

In the export of fines of 60 per cent Fe and 58 per cent Fe, the industry is incurring losses from all despatching stations.

Why, then, should the miners continue to export iron ore if they are making a loss? The reason is that unless fines are evacuated from the mines constantly, there cannot be sustained production of lumps to be supplied to the domestic sponge iron/pig iron/steel industry. The price of lumps being good in the domestic market, it helps the industry make good some loss incurred on exports of fines.

In such a situation, the possibility of ‘super-normal' profits of 80 per cent of the sales revenue, as indicated by the Government of Odisha, seems remote. To ensure supply of calibrated lump ore (CLO) to domestic steel companies, export of iron ore fines is unavoidable. In the mining process, iron ore is produced in the form of lumps and fines. In the last five years, the production ratio of fines to lumps has been increasing.

Higher generation

The proportion of lumps has come down from 60 per cent in 2006-07 to 47 per cent in 2010-11, whereas the proportion of fines has increased from 40 to 53 per cent in the same period. This means that, as one mines deeper, there is a higher generation of fines.

While calibrating as well as handling (loading and unloading) lumps for supply to sponge iron plants (6mm-18mm) and steel plants (10mm-40mm), there is further generation of fines. The ultimate proportion of fines works out to 70 per cent in Odisha.

Unless fines are evacuated from the mines, there cannot be further production of iron ore for supply to domestic industries. Since domestic demand for fines is limited, the only alternative is to export. The export of fines, therefore, is not by choice but out of compulsion.

For a distance of 660 km from Barbil to Paradip, the Railway charges Rs 910 for a tonne of iron ore supplied to domestic steel plants but for exports, the charges are Rs 2,879 — Rs 1,969 more.

Similarly, for the 395 km from Barbil to Haldia, the charges are Rs 587 if supplied to a domestic steel industry but, if exported, the charges are Rs 2,842, or Rs 2,255 more!

Such a high rate of freight is making export of iron ore fines unviable. There is, therefore, an urgent need to bring the freight rate to a reasonable level.

Export freight rate may be, at the most, twice the domestic freight rate. The recent hikes in the development and busy season surcharge should also be rolled back.

(The author is former Coal Secretary to the Government of India.)