Govt plans iron ore royalties linked to price

A man handles iron rods at a market in Siliguri February 27, 2008. The government plans to link royalties paid on iron ore to market prices rather than a fixed rate, the mines minister said on Monday, a move likely to increase the cost of the commodity.

NEW DELHI (Reuters) - The government plans to link royalties paid on iron ore to market prices rather than a fixed rate, the mines minister said on Monday, a move likely to increase the cost of the commodity.

Mines Minister B.K. Handique didn't give a level for the royalty, but R. K. Sharma, secretary general of Federation of Indian Mineral Industries (FIMI), said it was likely to be 10 percent on the sale price before freight costs.

Sharma, who was a part of a panel in 2007 that submitted recommendations on a new royalty system to the government, said at today's sale price, an average of $15 a tonne without freight, a miner would have to pay about 73 rupees a tonne ($1.5) in royalty against 27 rupees under the current system.

"I had suggested a lower rate, but the majority view of the panel was taken," Sharma said.

The panel's recommendation was accepted last year, but the financial meltdown and weakness in iron ore sales and prices delayed its implementation, he said.

Data from FIMI shows iron ore exports in 2008/09 year were at 105.764 million tonnes, up 1.4 percent from a year earlier.

Prices are currently at $56-$58 a tonne FOB, which includes road and rail transportation costs, down sharply from the peak of $145 in April-May in 2008, FIMI data shows.

Royalty rates were last revised in 2004, before an expansion in mining activity and a rise in prices. State governments, to whom the revenue accrues, have been asking the central government to set higher rates.

"This would increase the cost for iron ore miners and depress their margins if they don't pass it on to the customers," said Pawan Burde, senior analyst at Angel Broking in Mumbai.

"If they do increase the prices, their competitiveness in the export market would reduce, which might hurt exports to some extent."

Most of India's iron ore exports go to China, which has the world's biggest steel industry. One of the biggest exporters is Sesa Goa Ltd, a unit of London-listed Vedanta Resources Plc.

The proposal would be taken up by a panel of ministers for final approval, Handique told reporters at a media conference to outline the government's early agenda following its re-election last month.

New royalty rates would be decided by the panel, he said, declining to answer a question on how much additional revenue could be raised.

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($1=48.3 rupees)