Cancelling a domestic advantage
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On Friday the Supreme Court asked state-run NMDC to explore if it could enter into forward contracts for e-auctions of iron ore for long-term buyers. The observation is an attempt to provide relief to small steel units which have complained about the pricing of ore by NMDC, now the monopoly producer of the mineral. From April 2012 when it sold lumps at Rs 4,970 per tonne at the e-auctions the prices have climbed to Rs 5,400, a rise of almost 9 per cent in six months. NMDC, chastened after the row over iron ore mining, is playing safe, selling the mineral at an import parity price.
Next door public sector Coal India is also moving in the same direction. Its domestic production is far lower than what the power plants need, so to meet the gap it has begun to import and sell coal at an average of both prices. The reasons why the two sectors have reached here, we all know.
But as a result of the mess none of these minerals are going to be available at prices lower than imported ones, for at least the period of the 12th Five Year plan. The companies that will escape the price pressure are those with captive mines like Tata Steel, Sail or NTPC, Tata Power and R Power for those projects where they have coal blocks. For those even with coal linkage or committed iron ore contract, the costs will be high.
This is an interesting phenomena. The Indian economy is building in an additional round of imported inflation into its core manufacturing sector. The countervailing argument is that in the wholesale price index, coal and iron ore prices do not change prices substantially in the first round. That picture changes however, if the impact is extended to include electricity and steel too. Just as rising price of crude oil creates strong ripples, from now the global prices of coal and iron ore too will create a similar pass through impact, since we have nullified the advantage of having some of the deposits under our feet. Did someone say, natural gas?