Indian state seeks to tax big iron ore profits

India's biggest iron ore producing state has sought a new tax on mining profits and a higher royalty on steel feedstock, underlining a growing push from provincial governments and the steel industry to keep natural resources at home. The chief minister of eastern Orissa state, which accounts for about a third of India's iron ore production, wrote to Prime Minister Manmohan Singh this week, saying mining firms' gains should be taxed because they were benefiting "beyond any measure of reasonable returns".
"In less than a decade iron ore prices have increased more than ten fold. This is generating super normal rents or windfall gain far exceeding the level of investment or risk involved in the activities," Orissa Chief Minister Naveen Patnaik wrote in a letter.
"I am concerned about the huge profits accruing to merchant mining companies, a large number of which are in private hands," said the letter, a copy of which is in possession of Reuters.
While states have no power to impose taxes or ban exports, Patnaik's letter shows the growing pressure on the central government to keep resources to meet domestic demand, a move that is hitting exports from the world's third largest supplier of iron ore. The Indian government has stopped short of a countrywide ban, but it has raised freight rates and quadrupled export taxes on iron ore to discourage exports and ensure domestic steelmakers have enough of the raw material. The states of Orissa, Chhattisgarh and Karnataka havea also demanded a ban on iron ore exports. Last year Karnataka imposed a ban on movement of the commodity but has since been asked to lift it by the Supreme Court.
AUSTRALIA-LIKE TAX Such moves have seen India's iron ore exports fall for the first time in a decade last year, and shipments could halve over the next five years as it feeds the expansion of its steel industry. Lower shipments from India should help bolster prices that have already more than trebled from late 2008, as massive increases in global supply are only expected to come through by 2015 and demand from top consumer China rises.
Part of the reason that has kept India a top supplier of iron ore is its lack of technology to use iron ore fines, the sandy material that typically contains 55-65 percent iron and which comprises around 70 percent of its annual output of about 200 million tonnes. But there is a growing move among Indian steelmakers, whose traditional steel blast furnaces can use only iron ore lumps, to invest in more palletising and sintering plants that can take the iron ore fines now mostly exported to China.