India hikes rail freight rates on iron ore exports

Source: Wall Street Journal (by Arpan Mukherjee and Biman Mukherjee)

Date of Publication: March 16

NEW DELHI -- India's state-run railways has increased freight charges on iron ore meant for exports, a move which is likely to pull down the volume of iron ore shipped from the world's third-largest supplier just when exports were recovering from a slowdown.

The hike in railway freight by 300 rupees ($6.7) a metric ton is effective for two weeks starting Wednesday, a government official told Dow Jones Newswires, asking not to be named.

Industry executives said the increase will mean a 25% to 40% rise in existing freight rates. It will either push up Indian iron ore export prices or squeeze the margins of domestic companies that choose to absorb the higher cost, they said.

Railway freight cost accounts for about 65% of the cost of the ore exported. The hike in freight rates has jolted the domestic exporters as it comes barely 20 days after the federal railway budget spared them from an increase.

Indian Railways periodically changes freight rates, and local exporters say high logistic costs have hurt their competitiveness.

"It (the freight hike) is a very big deterrent and we will lose our competitiveness," Siddharth Rungta, president of the Federation of Indian Mineral Industries told Dow Jones Newswires. "We had started seeing a positive trend in exports after 13-14 months of dip."

Mr. Rungta expects iron ore exports to be between 99 million and 100 million tons in the year ending March 31, 2010, compared with 106 million tons a year earlier.

India has shipped 76.5 million tons during the April-December period, up from 66.5 million tons a year earlier, according to data from the Federation of Indian Mineral Industries.

Industry executives expect the freight hike to spill over to the next fiscal year, as the railways' costs have increased due to a rise in fuel prices by 6%-7% at the end of February. Road transport operators had also increased freight rates by 10% to 15% earlier this month.

Mr. Rungta expects India's iron ore exports may fall by 15% to 20% in the next financial year if the railways continues to charge the increased freight rates beyond March 31.

It wasn't immediately clear why the increase in railway freight charges has been only on iron ore, but domestic steelmakers have been lobbying for restricting the exports of the raw material to ensure their future supplies.

There has been a spike in demand from China, which may have also tempted the railways to increase the freight rates, said Pawan Burde, vice president in charge of research at Mumbai-based PINC Research.

China imported 49.4 million tons of iron ore in February, up 5.6% from a year earlier, with analysts expecting the rise to continue in April and May as importers take advantage of relatively low shipping freight rates.

The spot price of the benchmark Fe-63 grade iron ore has risen by $10-$15 a ton in the past one month to about $110 per ton. The prices are about 40% higher than a year earlier.

Indian iron ore exporters expect long-term contract prices to rise by 40% to 60% on year after the conclusion of ongoing price negotiations between Chinese steel mills and global miners Vale S.A, RIO TINTO  Ltd. and BHP BILLITON Ltd.

Monday, Rana Som , the chairman of India state- run miner NMDC Ltd., said that he expects the long –term price of iron ore lumps to increase to $ 110 a ton from $ 71 and that of iron ore fines to $ 85 a ton from $ 61.