A level playing field with sustainable mining needed

In 2010, the Karnataka government banned mining and exports of iron ore in an effort to rein in illegal mining. The government’s action upheld by the Supreme Court in subsequent two years largely helped in wiping out illegal mining. Today, Karnataka is seen as a model state when it comes to ecologically sustainable mining.

The apex court’s order has encompassed all issues such as cap on production, reclamation and rehabilitation plans, e-auction, and special purpose vehicle to carry out restoration of damage to ecology. However, the mining industry’s problems are far from over.

While the mining mess has been cleaned up with the intervention of the apex court leading to scientific extraction of iron ore, the imposition of several restrictions on the mining industry has led to a job loss and impacted new investments in the sector.

Between 2010 and 2013, the iron ore mining industry in Karnataka witnessed some unprecedented restrictions such as the ban on export of iron ore, cap on production to 30 million tonnes per annum (raised recently to 35 mtpa) and sale of ore through an e-auction system, which was not seen anywhere in the world. Some of these developments were contrary to the Central government’s policies.

“Subsequent to the imposition of these restrictions, which were executed under strict vigil of the monitoring committee, the mining industry is totally turned to white from black in the last eight years,” says Basant Poddar, a senior member of Federation of Indian Mineral Industries (FIMI).

According to him, “The war is over, culprits are gone and the time is ripe for creating a level playing field in the industry. There is a need for lifting the ban on exports, increase production and allow free sale of iron ore to make the sector attractive for new investors.”

In favour of buyers

While there is an adequate supply of raw material at present, many lessees are finding themselves with a huge stockpile of unsold material for want of purchasers. Iron ore produced in Karnataka can be disposed of only to a restricted group of purchasers, while the steel mills in Karnataka are allowed to procure iron ore from anywhere in the country and even import. The said scenario has created a skewed iron ore market in the state which is heavily tilted in favour of purchasers.

“When there is a free trade for all commodities across the country, why should it be restricted to miners in Karnataka? The restrictions were meant only for a temporary period until the illegalities are removed. Now that there is no scope for illegal operations, it would be better to open up the trade to achieve sustainable development of the mining sector,” Poddar said.

The Supreme Court, by order dated September 2, 2011, and September 23, 2011, permitted sale of iron ore through e-auction by the monitoring committee, of the existing stock pertaining to the mining lessees in the districts of Ballari, Chitradurga, and Tumakuru.

The e-auction mechanism was envisaged as a temporary mechanism for two years but is continuing to-date. “Although, the system per se is not a bad idea, there are lots of infirmities in the system. It is impacting our working capital. Once, the ore is produced and readied for auction, the mines department officials visit the mines and inspect the material and fix the grades. Once they certify the material, it goes for auction, which happens once in a fortnight and the entire process takes as much as three months and our payment happens only after that,” another FIMI official says.

The present system allows only the end–users such as steel plants, pig iron plants, pelletisation plants, sponge iron plants and beneficiation plants who have been wholly or partly dependent on the iron ore from Karnataka for their own use to participate in the auction process and export is not permitted. This has led to a distorted market situation where the mining lessees can only cater to a restricted group of purchasers. According to miners, it is necessary to remove the e-auction system, which will enable them to expand their market.

Even the Supreme Court-appointed Central Empowered Committee has agreed that e-auction is not any longer required. The question of whether any of these systems must continue is pending before the apex court, which will be hearing the matter on November 20, 2018.

It has been eight years since the mining industry in Karnataka exported iron ore. Not allowing the industry to export iron ore and pellets (a value-added product) in the current scenario will deprive the industry of earning foreign exchange for the country. Given the rupee’s depreciation against the dollar, allowing exports will benefit the country largely and earn precious foreign exchange, analysts tracking the industry said.

Current scenario

At present, there is a huge demand for pellets in the international market and are sold at a record $170 per tonne. Karnataka’s installed capacity of pellets is 7.5 million tonnes per annum.

“There is no reason why exports can’t be allowed if there is a value addition. Many leases will expire in 2020 and the miners are looking to maximise their returns as the prices are very high for pellets in the international market. Miners have limited buyers domestically. If there is no demand for their ore in the domestic market, it’s better to export,” Ritesh Shah, a senior analyst who tracks the sector closely, said.

Moreover, not allowing exports will also lead to underutilisation of key infrastructure facilities like railways and ports.

Following the restriction on the production of iron ore in the state, the investors in the steel sector withdrew their investment proposals. The withdrawal of restrictions will enable the state to attract new investment in the steel sector.

Karnataka can attract at least Rs 50,000 crore fresh investment in the steel sector if the availability of iron ore increases in the state. It will also lead to the creation of at least 20,000 jobs directly and five times more indirectly.

Another major problem the mining industry is facing in Karnataka is the expiry of a large number of leases in 2020. This will lead to a further shortage of iron ore for end users, according to analysts tracking the sector.

Even the Kudremukh Iron Ore Company, a state-owned pellet maker, is ineligible to participate in e-auctions because it exports all its produce. It is forced to buy ore from South America, while the ore is available within 500 km.

It is a fundamental economic principle that an imperfect market is not desirable and that a free market will find its equilibrium. However, this is not achievable in the state due to the restrictions placed on iron ore mines. In order to rectify the present situation, a level playing field has to be facilitated by allowing disposal of unsold material in alternate markets.