INDIA BUSINESS WORLD - JANUARY 1^st - JANUARY 15^th - 2008

AD VALOREM ROYALTY RATES FOR MINERALS

In a move that would dramatically hike the cost of minerals, including iron ore, and raise revenues of mineral-rich states, the government is preparing to dump low, specific rates of royalty and replace it with royalty that would change with the ore's market value. A Cabinet note on a shift from fixed-sum-pertonne of ore to ad valorem rates of royalty is doing the rounds of the ministries concerned.

The ores whose prices would go up include iron ore, limestone, zinc, bauxite, manganese, diamond and uranium. The change would escalate the cost of minerals several times over and impact companies such as Tata Steel, Mittal Steel (LN Mittal Group), SAIL and Posco. The royalty on iron ore is set to rise 10-fold.

"A proposal may soon be tabled before the Cabinet. The proposal, prepared by the mines ministry, advocates shifting the royalty rates on all major minerals to ad valorem rates. As per the proposal, a 10% royalty on iron ore (of all grades - lumps, fines and concentrates) has been proposed, which would result in an over 10-fold increase in earnings for mineral-rich states such as Orissa, Jharkhand and Chhattisgarh," an official source said. It is learnt that other arms of the government are in agreement with the ministry of mines. Royalty on ores goes to state governments.

The move could dampen iron ore exports as well, which would be some consolation for the domestic steel industry.

The royalty rate on iron ore varies from Rs 13 per tonne to Rs 27 per tonne, depending on quality. With iron ore prices ranging between Rs 2,500-3,000 per tonne, a 10% ad valorem rate would adversely impact steel prices, already affected by a sharp rise in coking coal prices.

The new rate is also higher than the 7.5% suggested by the Hoda committee on the New Mineral Policy.

The proposed policy does not distinguish between captive and non-captive mines. This will have far-reaching implications for the entire regime of captive mines.

"Increase in royalty on minerals could be justified only if a portion of additional revenues to states is ploughed back for development of infrastructure in mining areas, which is not in good shape. Moreover, the rates should be adjusted only in line with international practices and should not be unique to India," SAIL chairman SK Roongta said.

While the new royalty rates would impact steel producers and iron ore mining companies alike, it would increase states' royalty earnings (from all non-coal minerals) by almost 100%, from Rs 2,014 crore (at 2006-07 production levels) to Rs 3,943 crore. The royalty from iron ore itself is likely to increase from Rs 247 crore to Rs 1,650 crore.

"Royalty rates on minerals (should) be revised regularly and a decision about revision of rates of royalty (should) be taken well before that date on which the revision falls due," Orissa chief minister Navin Patnaik had written in a letter to the Centre.

Under the new royalty structure, states would have to earmark 10% of their royalty earnings for infrastructure development and local community benefit programmes. Moreover, the benefits would only accrue to states that do not impose or repeal additional tax/cess imposed on mineral-bearing areas.

As per the proposal, apart from iron ore, the royalty rates on other inputs required by steel and other metal-based industries is also set to rise manifold. Royalty rate on manganese ore has been proposed at 4.2% and for its concentrate at 1.4%. The rate on nickel has been proposed at 0.2% of London Metal Exchange nickel metal price chargeable on the metal contained in the ore. Bauxite and laterite (despatched for aluminium metal extraction) are set to attract a rate of 0.5% of LME aluminium price chargeable on the metal contained in the ore while for other use it will be 25%. For zinc ore, the rate will be 8% of LME zinc prices. Its concentrate will attract a rate of 8.4% of LME prices while the rate for copper will be 4.2% of LME prices.