NMDC Seeks Karnataka Approval for 5 Million-Ton Steel Plant

NMDC Limited (Hyderabad), India's largest producer and exporter of iron ore, is awaiting approvals from the state of Karnataka to set up a 5 million-ton-per-year steel plant. According to Industrial Info Resources (Sugar Land, TX), the plant is likely to be located in Bellary in the eastern part of Karnataka. The state government is proposing to promote Bellary and the adjoining areas as the "steel district," with plans to develop townships and allied industries.

The Karnataka government introduced its new mining policy with 13 objectives that include introducing new state-of-the-art mining technologies, transparency in mining licenses, granting licenses only to those companies that will export minerals with value addition, and development of new industries that will utilize the raw materials in the area. Karnataka is among the very few states in India to have its own mining policy. The mining policy clearly states that existing licensees can continue with their export and domestic sales, but the condition of exports with value addition will be made mandatory and included in the licenses during the next review.

The mining policy has come under severe criticism regarding the licenses allocated to NMDC's mining companies. The policy recommends and encourages foreign direct investment in this sector, so that the latest, cutting-edge mining technologies not possessed by Indian companies may be used. Indian critics see this step as losing their right over the country's vast natural assets. The royalties to be paid by the mining companies for the use of mining assets is only 2-3 percent of the sale. There are claims that the policy has been influenced by international mining companies in order to suit their own business interests. Karnataka was in favor of nationalizing the iron-ore sector to put an end to illegal mining. Critics claim that the international lobby is so big and powerful that not only was the idea of integrating into the nationalization plan dropped, but the demand to increase royalties also went unheeded.

The iron-ore industry in India has been going through troubled times. NMDC had to face stiff opposition from 125 secondary steel manufacturers in Chhattisgarh who threatened to block the transport of iron ore from NMDC. NMDC, which has two of its three plants in this state, had decided to slash the rate of iron ore by 25 percent from December 1, 2008. The steel makers were not enthusiastic about the price reduction. Being the third largest consortium after Rashtriya Ispat Nigam Limited (Vishakapatnam, India) and Essar Steel Limited (Mumbai) to buy from NMDC, they demanded that the price be reduced to $34 per ton. NMDC raised the price of iron ore in April by 40 percent. As part of the negotiation, the steel makers also demanded exemption of $26 million, the differential sum that had to be paid to NMDC in October because of the price hike. The seasonal and erratic pricing in this sector is causing a lot of concern and chaos.

In a recent move, NMDC proposed to develop an index of pricing for iron ore on the lines of the non-ferrous index of the London Metal Exchange. Iron ore presently does not have a pricing format that is acceptable to both selling and buying parties. Price has always been decided on the basis of demand and supply and comparison of profits in international and domestic trade. Another advantage of indexing is that small buyers and sellers will be protected from price variances. Last month the price of iron ore suddenly dropped to $60 per ton. Leading mining companies had signed forward contracts only in May-June of this year at $190 per ton. This caused the absence of a pricing system to be felt immensely. While forward contracts have been the most common method to insulate companies against price fluctuations, the method did not seem to work in this case. A need for a system that can provide a permanent, stable pricing mechanism to both buyers and sellers has therefore become imperative.