Home Governance IRON ORE PRICES NMDC continues to suffer losses, voluntarily
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IRON ORE PRICES NMDC continues to suffer losses, voluntarily

Why despite huge losses for several years, NMDC and successive governments have turned a blind eye to such ill-conceived pricing policy that benefits only the buyer? Is it because NMDC comes under the Steel Ministry and not the Mining Ministry?

WHAT happens when a leading mining company, which is majority-owned by the government and also listed on the stock exchanges, deliberately sells its mined output year-after-year at a hefty discount to international benchmarks? Ideally, the company’s trade practices should come under intense scrutiny and a full-scale investigation must be ordered to dig out the extent of loss, both to the State exchequer as well as minority shareholders. This should be followed by a course correction and re-pricing of mined minerals.

However, this is not the case if you are the country’s largest miner and happen to operate in India. Six years after the nation’s auditor, the Comptroller and Auditor General of India, tabled a report that found flaws with the National Mineral Development Corporation’s iron ore pricing formula that was causing huge revenue loss to the Navratna company, it is business as usual for the State-owned miner. The CAG audit had shown that NMDC was adopting a net back formula, which resulted in low pricing of the ore. According to the said report, the adoption of the net back formula resulted in a loss of Rs. 100 crore to the company while companies that purchased ore from NMDC made huge profits.

Fast forward to year 2016. If the price of NMDC’s ore is compared with the international index price, the national miner’s ore is being sold to steel making companies in the Hospet region at a steep discount of Rs. 2,500 to imported ore prices in the same region. Low base price fixation by NMDC during e-auction and an absence of competition has meant that NMDC has suffered an estimated loss of Rs. 2,500 crore in FY2014-15 alone. It is also potential loss to the Karnataka State Government and the Central Government as it means less royalty and less VAT.

A sharp reduction in potential revenue realisation also translates into lower dividend payout for both the government, which owns 80 per cent stake in NMDC, and the 20 per cent minority shareholders. A back-of-the-envelope calculation shows that going by NMDC’s net profit for 2014-15, which was a robust 52 per cent of sales, the company not only suffered a potential revenue loss of Rs. 2500 crore but also a potential profit loss of Rs. 1,300 crore.

But how has the NMDC managed to brazen out despite strong reprimand from CAG and numerous petitions in courts, highlighting this grave anomaly. NMDC enjoys nearly a monopoly status in the domestic iron ore market with strong pricing power and ability to capitalise on any recovery in the steel sector. Being the largest iron ore miner in the country, NMDC revises its prices every month depending upon the prevailing demand-supply scenario and plays a crucial role in determining mineral pricing model.

In fact, it was only after taking cognizance of the CAG report, the Apex Court had directed that sale of iron ore be conducted through an e-auction in the State of Karnataka. While the intent of the Court in ordering the said e-auction was to achieve transparency in the sale of ore at the correct market price, NMDC has been taking advantage of its monopoly position and fixing the price so close to the base that ore is sold at a steep discount to the landed cost. Thus, the situation prevailing during the time of CAG report in 2010 continues even today, albeit with a difference. Now, potential revenue loss is much higher.

While NMDC stoutly denies any sale at a steep discount to imported ore price, it was recently caught on the wrong foot in the Supreme Court. In its response to a civil suit that charged NMDC of selling iron ore at exorbitant rates to steel manufacturers in Karnataka, the company rebutted the same and said the sale price of its iron ore was at 50 per cent discount to the price of imported ore!

The reply, which was filed on August 22, 2016, says: “Despite differential prices and all the contrary claims, NMDC offers the lowest landed cost to all steel majors depending on Karnataka ore. The landed prices of NMDC iron ore is (sic) almost 50 per cent of imported iron ore.”

ONE then is forced to ask—what is forcing NMDC to sell at such huge discounts when it is also a professionally run corporate that owns an explanation to not just its shareholders but also the nation. Why is it that despite such huge losses for several years, NMDC and successive governments have turned a blind eye to such ill-conceived pricing policy that benefits only the buyer? While steel is a key ingredient in nation’s development and progress, steelmakers cannot arm twist State-run miners to sell their product at a 50 per cent discount while they rake in the moolah. A discount to international benchmarks may be warranted to encourage steel output, but it has to be within a reasonable limit.

It is indeed surprising that even as CAG has highlighted the anomalies in NMDC’s pricing policy, the Steel Ministry continues to “guide” the State-owned company and ensure that India’s largest iron ore miner provides hefty discount in comparison to international landed prices. While the Steel Ministry has announced plans to set up a panel of experts to study NMDC’s pricing mechanism and auction process, it is unlikely to result in any substantial dividend for miners due to pressure from steel manufacturers. It is baffling how the Steel Ministry continues to be the nodal ministry for NMDC despite the obvious and glaring conflict of interest. Thus, the only way to correct this anomaly, and rightfully so, is to move NMDC from the Steel Ministry to the Mines Ministry, failing which the discounted price mechanism would continue to exist.

Low base price fixation by NMDC during e-auction and an absence of competition has meant that NMDC has suffered an estimated loss of Rs. 2,500 crore in FY2014-15 alone

Another way to correct the present situation is by creating an index for different regions, where iron ore is sold based on the landed price of imported iron ore and which truly depicts the present day demand and supply situation. Such index developed by the Indian Bureau of Mines can be transparently used as guidance for price and any discount to such a price needs to be explained mandatorily by any seller. Such guidance and mandatory law will only ensure the correct valuation of Indian ore on par with the imported ore. It will also ensure that State-owned companies do not bleed for the benefit of the private sector.

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