The Indian Finance Ministry announced an increase in export taxes on iron ore over the weekend, a move we believe is a direct shot at Chinese steelmakers, which are bidding up spot ore prices to record levels and are probably accumulating inventories ahead of attempted price negotiations with the iron ore majors.
This move is also another example of what we call "resource hoarding" -- countries placing export restraints on key raw materials, which is trade distorting and illegal under World Trade Organization regulations.
The distorting impact of export taxes works in two ways. First, restraining exports of key raw materials lowers the price of these inputs to the local market and in effect subsidizes domestic producers which would otherwise have to pay market prices for these inputs. Second, keeping these raw materials off the global market effectively raises the price to non-domestic producers by restricting the global supply of these key raw material commodities.
The Indian Finance Ministry, over the long holiday recess, surprised the market by quietly announcing a 5% increase in iron ore export taxes. Meanwhile, taxes on lump ore will rise from 5 to 10% and fines will have a new export tax of 5%.
While there's been some press on this in India, there's been very little in the West, and only a single line on the Chinese Web site, www.mysteel.net.
While the Indian press already has misunderstood the move -- most articles say the tax is a bad move for the domestic steelmakers -- we suspect when China, Brazil and Australia come back to work on Monday, the world will notice that this move is a direct shot at the Chinese steel mills, which we believe have been building stockpiles of ore in advance of ore price negotiations coming in January.
Spot ore prices have reached new highs in recent weeks and we suspect that the Indian move is targeted not only at helping domestic Indian mills by keeping more ore inside the country but also at the disruptive effect of Chinese stockpiling and import, which could end up being a temporary trading move aimed at the iron ore majors.
India, like Brazil and Russia, long has been invested in leveraging its low-cost ore position into expanding its local steel industry rather than enhancing its position as an ore exporter. We believe that this move is consistent with the country's longer-term steel policy and expect to see further moves in order to minimize the export of ore to China.
Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.