Selling the family iron ore to China

Contemplating a ban on iron-ore exports is absurd

The bulk of India’s iron-ore exports last year went to China. This is being bandied as something sinister by those who dislike China because of geopolitical reasons and by those who dislike selling ‘our’ ore to ‘them’ instead of letting ‘our’ manufacturers have it.

1. So why do Indian mining companies prefer to sell their iron-ore to Chinese buyers?

a) Because they like the Chinese
b) Because they are not patriotic
c) Because they get a better deal by selling to the buyer who pays them a higher price

2. So why do Chinese buyers pay a higher price?

a) Because they like the Indian iron-ore producers
b) Because they are not patriotic
c) Because they get a better deal by buying iron ore from the cheapest seller

3. If the situation were reversed, Indian iron-ore was more expensive then

a) Indian manufacturers would pay a higher price to buy desi maal, out of patriotism
b) Chinese sellers would refuse to sell iron-ore to India at international prices
c) Indian manufacturers would buy the cheapest iron-ore available in the international market

4. If Indian politicians decided to ban iron-ore exports to China then:

a) China will stop selling cheap consumer goods, and India will retain its trade surplus
b) Indian cafeterias will serve drinks in disposable cups made of steel
c) China will continue selling cheap consumer goods to India, and India will face a trade deficit

5. Why do Indian consumers buy cheap consumer goods manufactured in China?

a) Because they love the Chinese like they love Chicken Manchurian (which by the way, we have from authority, is not even an authentic mainland Chinese dish)
b) Because they are not patriotic
c) Because they end up with more money in their pockets by buying the cheaper Chinese goods.

Indian iron-ore producers benefit. Indian consumers benefit. Indian manufacturing benefits too—because manufacturers are whipped up into shape by competition. If there is something that the Indian government needs to do it is to allow Indian manufacturers to compete with their Chinese counterparts on a level playing field. The playing field is not level. Not because of the Chinese government, but because of the Indian one. First, inflexible labour laws cause manufacturers to be less productive, or invest in automation instead of using the abundant labour. Second, the looming threat of private sector reservations is about to make this worse. Third, the government is adding to manufacturers’ costs (or hurting their productivity) by not getting its act together fast enough on the infrastructure front.

That’s the way to think about China.

9 thoughts on “Selling the family iron ore to China”

  1. Perhaps the government wants iron ore producers to cling on to the iron ore rather than sell? Do Indian manufacturing companies necessarily buy _all_ their iron ore from India? Perhaps not. I read sometime ago about how the quality of iron ore in India isn’t too great compared to Brazil/Australia.

  2. Jagadish, it depends on what one wants to with the ore and the global price is commensurate to quality (and ore availability). So quality is mute point.

  3. Nitin and Jagadish. I wish the Chinese too shared your liberal sentiments. But on the contrary they are locking up natural resources in many countries across the world especially in Africa and preventing it from getting onto the open market. I think that is what is at the basis of this Anti-Chinese sentiment. And it is not limited to India even the US recently prevented the Chinese from buying up an oil firm fearing exactly the same. And the Chinese did nothing to assuage that fear they coyly said that they will sell all the oil mined from North America only in the North American markets??

  4. Apollo

    But on the contrary they are locking up natural resources in many countries across the world especially in Africa and preventing it from getting onto the open market.

    Let’s assume this is accurate. How will India’s banning of ore exports change China’s behaviour in Africa? If anything, they may begin to ‘lock up’ even more.

    The ‘locking up’ is happening primarily on commercial terms. Chinese demand raising international prices, and Chinese buyers are willing to pay these prices, because their cost base (excluding natural resource imports) is still low. Fact of life is that Indian buyers are in the same market as the Chinese ones, and have to pay the market price. If they are to compete with the Chinese manufacturers, then, they too must reduce their cost structure. So what’s preventing Indian companies from doing so?

    As for the Americans, yes, there’s a lot of good things to learn from them. Protectionism, though, isn’t one of them.

  5. Nitin,

    I shall try to list out reasons as to why Iron Ore Exports should be banned.

    1. Iron Ore is a finite resource. It is also a very basic material, demand for which shall remain for time to come unless we come up with something which has the qualities of steel but one which not only has more strength, but more importantly is cheaper to produce.

    2. Currently, Royalty being paid to Government is a farce. While there are ‘n’ number of Illegal mines, Legal Mines get off by paying Rs.24 to Rs27 per tonne (Link : http://tinyurl.com/ya6ljv) when Iron Ore gets a Market Price of around $ 100.00 per tonne.

    3. People against the Ban (mostly Exporters) say that, India has a very huge quantity and hence we wont finish it off early. But, one thing they forget is that, much of the Ore is in areas which are Ecologically Sensitive (like the Western Ghats) and in all probabilty, we shall never take the ore out of there.

    I believe that Export of Ore is akin to what the Britishers did long back, ie Export the Raw Materials and Import the End Products.

    With regard to your comment “The ‘locking up’ is happening primarily on commercial terms”, I believe that it isnt so. The Chinese have come to the conclusion that, the more you lock up and let prices heat up, more it affects the competetion (India among others) than it affects them. This is due to the fact that the Yuan is highly under-valued and this itself is creating oppurtunities for them.

    Even, Russia which has been a Principal Exporter of Petroluem products, is trying to use its resources to benefit the country more than using it all up in the Greed of getting a good price.

    Cheers

  6. Prashanth,

    1. Iron Ore is a finite resource. It is also a very basic material, demand for which shall remain for time to come unless we come up with something which has the qualities of steel but one which not only has more strength, but more importantly is cheaper to produce.

    Unless there are elements of market failure (due to externalities, inability to assign property rights etc) the best way to allocate scarce and finite resources is through the market. Despite its wide use, there is nothing fundamentally different about iron-ore. Btw, I’m sure you are aware that iron and steel are being replaced too. The same applies to your point #3

    Currently, Royalty being paid to Government is a farce. While there are ‘n’ number of Illegal mines, Legal Mines get off by paying Rs.24 to Rs27 per tonne (Link : http://tinyurl.com/ya6ljv) when Iron Ore gets a Market Price of around $ 100.00 per tonne.

    Fair enough. That suggests that the government must sort out the mining industry.

    I believe that Export of Ore is akin to what the Britishers did long back, ie Export the Raw Materials and Import the End Products

    Heard of comparative advantage? I think this view is born of a deep sense of insecurity rather than confidence in the industriousness and dynamism of Indian industry.

    All this business of restricting trade with China is reminiscent of Pakistani policy: cut off the nose to spite the face. They won’t trade with India even if it benefits them. Pointing out all real and believed instances of bad policy does not imply that India should copy them. Good luck to the Russians and the Chinese, but let’s do what’s good for us.

    Related Link: Why Ricardo’s idea is difficult to understand (via Wikipedia)

  7. Prashanth’s comment pointing out the state of mining industry in India is very valid. When I first read this post, I was surprised by the lack of any mention of that.
    It appears like the existing mining policies favor a lot of small leases. The round of allegations and counter allegations from Bellary in Karnataka – involving Congress politicians, a politician who came from Congress to BJP, and ofcourse the Gowda family – seem to indicate that the Government will have to do a lot more than a mere ‘sorting out of the mining industry’.

    There was an article in the Indian express (link http://www.indianexpress.com/story/16768.html) that provided data from the point of view of States like Orissa and Jharkhand. Worth reading. It is very rare that you get material in the Indian media with data.

  8. Perhaps the underlying assumption of iron price begin formed and reflecting an efficient market is naive, at best. Who owns the iron ore and in what circumstances did they come to own it? The cost to the native populations in the Chota Nagpur area has been horrendous in the last 100 years. There has been no talk of compensation for them, nor an environmental impact assessment. The neo-classical market mechanisms that are espoused in an abstract context are implemented top down using power rather than bottom up buy-in. But then neo-classical economists worked and continue to work for those in power, helping the growth and sustenance of a lobotomized culture. Two links may be of interest in this context:

    Nobel acceptance speech by Yunus:
    http://nobelpeaceprize.org/eng_lect_2006b.html

    and a maverick approach to economics:

    http://economicapocalypse.blogspot.com/2006/12/signs-of-economic-apocalypse-12-11-06.html
    Quote
    [N]eoclassical ideology has been a boon to those in our midst who are incapable of moral reasoning: psychopaths, those with no conscience. In fact, it could be argued that Neoclassical economics could only be the basis of organizing society if either no one were psychopathic or if everyone were. In our mixed world, where perhaps 6% of the people have no conscience, neoclassical economics is a way station to tyranny since it simultaneously provides a way for the unscrupulous to gain wealth and power while inhibiting the natural conscience-based morality of normal humanity.
    Unquote

  9. Very interesting and informative discussion. Reason, thanks for that link. I did not know much about the iron ore controversy before but I read a related column in the Indian Express – http://www.indianexpress.com/story/16018.html.

    Even as a votary of free markets, I have to admit that natural resources are different from churning out finished goods to be sold everywhere. In the 21st century and beyond, finite natural resources such as fertile land, fresh water, rainforests, biodiversity and natural minerals are going to be more valued and the bone of contention among nations.
    The questions to be asked are:
    Are the people of the lands where iron is mined, allowed to profit equitably from it? Are the state governments and mining companies allowed to sell at the market price of their choice? If not, then this is not really a ‘free market’.
    Are we taking into account environmental impact, displacement of the natives and adequate compensation for their land? If not, India is only inviting trouble.

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