The Indian Economy Blog

December 8, 2006

Selling The Family Ore To China

Filed under: China,Infrastructure,Politics,Trade — Nitin @ 6:30 pm
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 selling raw materials to China.

11 Comments »

  1. Neat way of putting your argument across!

    I loved this line in the link you put across. “In fact, the ministry has generously issued new licences for exporting high grade iron ore to private mine owners.” Generous, huh!

    There is this other report “We don’t have enough iron ore reserves left: NCAER” http://economictimes.indiatimes.com/articleshow/726856.cms

    So?

    Is there something exclusive to the dynamics of this industry that we should be worried about?

    Comment by Naveen — December 8, 2006 @ 11:25 pm

  2. While I agree that Indian manufacturers are not all perfect, it is well believed that Chinese govt indulge well into their manufacturing industry and pump in a lot of money (and artificially depreciating Yuan) to keep them afloat. So, it is not that Chinese manufacaturers are more effecient. On the contrary, international studies show that Indian industries are some of the most productive in Asia with highest yield to a dollar invested. And Chinese grow because of their government. Indians grow inspite of the government.

    So, it is not because of free market that Chinese are sucking up Indian ores. We need to proactively step up by stopping ore supply and give more filip to the manufacturing business that will help in the long run for employment. Otherwise mining is a dirty business and not worth the trade dollars. And by stifling their ore supply, their manufacturing might get more costlier, giving some room for our manufacturers to compete on a level-footing.

    Comment by Balaji Viswanathan — December 9, 2006 @ 1:17 pm

  3. it is well believed that Chinese govt indulge well into their manufacturing industry and pump in a lot of money (and artificially depreciating Yuan) to keep them afloat.

    One can believe anything. As for the undervalued Yuan, surely you will know that the INR is undervalued too. Indeed, not exporting to China and running a trade deficit has implications for the valuation of the Indian rupee that are not entirely pleasant.

    So, it is not because of free market that Chinese are sucking up Indian ores. We need to proactively step up by stopping ore supply and give more filip to the manufacturing business that will help in the long run for employment.

    You think Chinese manufacturers will be unable to find iron ore in the international markets? And the price differential will dent their competitiveness vis-a-vis India?

    And by stifling their ore supply, their manufacturing might get more costlier, giving some room for our manufacturers to compete on a level-footing.

    Their manufacturing is cheaper because of their overall lower cost structure (cost of labour, infrastructure etc). In all likelihood this will ensure that they’ll be able to absorb the changes in prices of raw materials, while Indians can either empoverish the miners or drink coffee in throwaway steel tumblers.

    Finally,

    Otherwise mining is a dirty business and not worth the trade dollars.

    It is not for any one of us to make such value judgements. Heard about economic freedom?

    Comment by Nitin — December 9, 2006 @ 2:41 pm

  4. Since most chinese businesses, and indeed all chinese MNCs are basically owned by the Chinese government, their investment, buying and selling decisions are not motivated purely by the concept of free trade. They have made very unsound business decisions that make alot of geo-political sense.
    Not only India, other countries have also been cautious about Chinese business firms and their working.
    If India has excess ores to sell, it can sell to other players in the International market.
    shivani

    Comment by shivani — December 9, 2006 @ 5:05 pm

  5. @Nitin
    I say mining is a dirty business due to the significant environmental impact and health costs to the workers. You should definitely read what happened to countries like Nauru and many African countries that depended on mining. Mining could only be justified if used by domestic manufacturers that will strengthen the economy and exporting raw materials is a shame for a mature indutrialized country. And a countries strategic reserves should always be preserved. For eg, US never utilizes majority of its Oil reserves that it keeps for the future, when world runs out of oil.

    And India is nowhere near hard-managing rupee as Chinese do. Though RBI occassionally intereferes, the undervaluation is not more than 5%, and Chinese are undervalueing by more than 60% Vs Dollar.

    If various countries stiffen up the raw material exports to China and increase their domestic consumption, Chinese manufacturing will definitely get costly.

    Comment by Balaji Viswanathan — December 9, 2006 @ 10:34 pm

  6. I completely disagree with Balaji Viswanathan. Not all countries are bestowed with natural resources, so export and import of natural resources are common. If Oil exporting countries apply the same logic of yours, then today we would be riding bulloc carts. Your comments about US oil reserves are also wrong. If US runs out of oil reserves, US may run only few months with its OIL reserves.

    If mining is hazardous to environment and causes health problems to miners, then better and sophisticated technology should be developed.

    Coming back to the main topic of iron ores…..
    Defintely China is importing iron ores elsewhere at this time. Where to import and how much should be imported is still governed by Chinese government. Private players donot have a say in that. China tries to derive political gains by choosing countries to import their raw materials. For now, their import of iron ores is expensive. So exporting the iron ores to china should not be a cause for concern for India. Also the quality of steel produced by china is not good compared Other steel producers. China beats competition by volumes.
    We should be seeing softening of prices in steel sector in couple of years due to increase in suply by china. However companies like Tata are moving away from commodity business to branded steel. So Huge supply of steel from china in future should not be a concern.

    Comment by sridhar — December 10, 2006 @ 9:08 am

  7. The fact is that China only import a fraction amount of iron ore from India. Brasil is the main iron ore exporter for Chinese steel manufacturers. Most of the India iron ore exported to China are regarded as low quality iron ores.

    India’s trade volumn is only a bit more than 1/10 of China’s so India should promote its current exporting of everything if possible.

    “Chinese are undervalueing by more than 60% Vs Dollar.” — Do you mean China’s nominal GDP is actually 5 times of India’s GDP? (now it’s 3 times of India’s)

    Comment by Gus — December 10, 2006 @ 9:48 am

  8. Paul Krugman explains why this idea is difficult to understand.

    Comment by Nitin — December 10, 2006 @ 11:05 am

  9. @Sridhar
    The US reserves I talked about is the billions of barrels that lie in their untapped resources (not their strategic reserve) that lies in Alaska and other regions. US is definitely nowhere near their full utilization potential and deliberately so.

    The middle east export oil, as tey dont have any other economy. If they didnt export oil, they would be as bad as Somalia or Sub-saharan Africa. Our position is not the same. We could afford to lose the couple of billion dollars that we gain by exporting ores and though exporting ores might have made sense in 1947, but now as an industrialized nation it no longer should. Mature modern economies are built on steel.

    The government must seriously consider why it is not fully utilizing its ore capacities and if you could export to China, why not to Korea (Posco is waiting to invest $12b dollars but just being kept out by the pro-Chinese communists).

    The truth of why India is exporting to China and not to those who are willing to invest billions is because of poor Chinese policy (that swings from irrational anti-Chinese to stupid ultra pro-Chinese)

    Comment by Balaji Viswanathan — December 10, 2006 @ 12:54 pm

  10. Its a question of controlled exploitation of natural resources. Its not as if India has very large surplus of iron ore and hence controlling ore exports makes sense. Infact according to some reports India’s high grade ore reserves may last only 10-15 years. Given this, arguing about economic freedom doesn’t make sense. The Chinese with their maniacal push to increase steel production (resembles Mao’s “great leap forward” of 1961!) have created a heavy demand for ore and that is pushing ore prices to astronomical levels, and naturally people are flocking to exporting ore to satisfy the demand and cash in heavly. It’s not like if India doesn’t export, then someone else will. It may be partly true, but the demand is so great that China is looking at any available source, even disregarding the quality of the ore ( you just have to read about the Janardhana Reddy/Kumaraswamy scandal in Karnataka to get an idea about this). In this environment the gov’t should intervene and control the export iron ore to safeguard the domestic steel industry. You simply can’t draw parallels with countries exporting crude oil, coz the two commidities and the volumes involved are completely different.

    Comment by VS — December 11, 2006 @ 2:27 pm

  11. If the Tata takeover of UK steel maker Corus fails and Brazil’s CSN is successful, then Corus will be importing iron ore from Brazil instead of India which will leave more for export to China.

    Of course when Mittal Steel‘s new plant in Orissa, India goes online it will consume local Iron ore.

    Also look forward to South Korean steel giant Posco’s plan for building a $12bn plant in Orissa.

    Comment by Salauddeen — December 23, 2006 @ 10:39 pm

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