Why India needs a regime for the pricing of minerals

By Manoj Kumar, Hammurabi & Solomon

Despite being the one of the world’s largest suppliers of coal, steel, iron ore, bauxite and zinc, India’s mineral pricing system lacks objectivity and transparency, resulting in an unhealthy tussle between mining companies, user industries and government.

Manoj KumarFounder and managing partnerHammurabi & Solomon
Manoj Kumar
Founder and managing partner
Hammurabi & Solomon

While the Indian Bureau of Mines publishes sale prices of minerals (other than those listed in the Atomic Energy Act) for each state for the purpose of calculation of royalty payable to the state, there is no clear mechanism behind such pricing and at what prices are these minerals sold in the market. The bureau’s prices also do not appear to be linked with any global index.

The National Mineral Policy, 2008, says that “the approach shall be to make available mineral based material to domestic users at reasonable prices as determined by market forces”, and further states that “prices should reflect their value … The fiscal dispensation will generally aim to ensure that adequate compensation is forthcoming to the state in return for the concessions it grants.” However, none of the laws regulating minerals defines “reasonable price” or provides a benchmark calculation method for pricing minerals. As a result, while iron ore is already being sold at a 40-50% discount in the domestic market as compared to the international market, steel industries demand even cheaper prices.

The irregularity and differential treatment in pricing not only creates a vulnerable market but also causes substantial loss to the government in terms of royalty. In the absence of a standard formula, various pricing methods are used.

To name a few, for iron ore, international buyers and sellers follow indexes such as Platts IODEX. For copper, prices quoted on the London Metal Exchange (LME), Shanghai Futures Exchange and the Commodity Exchange division of the New York Mercantile Exchange are cited; for manganese ore, the Metal Bulletin’s index price for cost and freight to China is used; and for bauxite, spot market prices are taken as the base price. Aluminium, zinc, gold, silver and certain other metals in India are priced based on prices quoted on the LME or by the London Bullion Market Association. Diamonds are in a different league as they are sold through auction and there is no price index due to pricing in the retail market being dependent on shape and the “4Cs” – cut, colour, clarity and carat.

In a departure from all the above, in the state of Odisha, which is India’s largest iron ore producer, mining companies set the selling price without referring to any international standards. However, in the same state, the price for chrome ore is set by the online auction held by the Odisha Mining Corporation. Even with 30% export duty, the domestic price of chrome ore is less than that of exports of chrome ore of the same grade.

In the state of Chhattisgarh, NMDC, which is controlled by the central Ministry of Steel, is the trend-setter for pricing of iron ore, while in Karnataka, iron ore is sold through e-auction where prices are quoted with substantially discounted value as compared to international prices.

Although all the above methodologies are now prevalent, none provides a concrete basis for arriving at a price at which the products are sold. The government must look at pragmatic and long-term solutions to ensure a win-win situation for mining companies, producers and the end consumers. The central government has recently proposed to cap the price of iron ore according to grade to ensure availability at a cheaper price. However, considering that it may result in revenue losses to the government, there have been proposals for market-driven pricing, i.e. linking the price indexes with the international markets as is done for oil and coal. Market-driven pricing has been opposed on the basis that such benchmarking might lead to higher cost of raw material and, subsequently, less off-take from the mines at a time when the country is sitting on surplus minerals and the cost of infrastructure has risen. Therefore, the inability of manufacturers to obtain raw material at the desired cheap cost is not a sufficient ground for ignoring irregularities in the pricing mechanism.

In order to improve the governance standard, the central government should encourage implementing a uniform mechanism for determining the pricing of minerals in India under the supervision and guidance of the mines bureau. This can be done in future national mineral policy as it can play a crucial role in the sustainable development of minerals as well as the manufacturing and infrastructure sectors.

Manoj Kumar is the founder and managing partner at Hammurabi & Solomon. The firm’s policy and regulation desk has been working extensively on both national and state policy reforms in the minerals sector.

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