As a measure to boost iron ore exports, Ministry of Railways (Government of India) on 09 May’16 abolished the dual freight policy (DFP) on iron ore and pellets. The new freight came into force from 10th of May’16 and will remain effective till 31 Mar’17.
The latest rate circular released on 09th of May’16 by the government states that, “The dual freight policy applicable for transportation of iron ore and pellets is discontinued. All types of iron ore and iron ore pellets, whether meant for domestic consumption for manufacture of iron and steel or meant for other than domestic consumption will now be charged at Class-165.”
“We have decided to discontinue the dual freight policy for all kinds of traffic related to iron ore transportation with immediate effect”, said Mr Mohammed Jamshed, Member Traffic, Railway Board. This comes on the back of India’s steel sector being under pressure due to low domestic demand and cheap steel imports from China.
What is Dual Freight Policy?
Indian Railways introduced DFP wef 22nd May’08, according to which transportation of iron ore was classified into two categories namely ‘domestic consumption’ and ‘other than domestic consumption’. The former was assigned a lower class and the latter a higher class. The DFP in effect led to freight difference between the above two classes Under the dual freight policy, transportation cost of iron ore and pellets meant for export was on an average three times higher than that for the loads meant for domestic use.
The primary objective behind setting up of DFP was to lower the cost of iron ore transported to domestic producers and to keep freight rates for iron ore export comparatively higher and garner high freight revenue in the event of increase in international iron ore prices. However, iron ore prices in international market underwent a downswing since FY15.
Initially, the transportatio n of iron ore for domestic consumption was assigned Class 170 in May’08; this was changed to Class 180 with effect from 13 Oct’08.
Iron ore for the transportation for ‘other than domestic consumption’ was assigned the higher Class of 200. With effect from 6 Jun’09, Railway Board revised ‘other than domestic use’, from Class 200 to Class 180 plus a Distance Based Charge (DBC) which comprised of lump sum amount per metric tonne plus a percentage of basic freight rate.
Later via notification dated 25 Mar’15, the class of iron ore was changed from Class 180 to Class 165. On 02 Sep’15, the central government again revised the DBC which was brought into effect from 08 Sep’15. The freight rate circular was fixed at a DBC of INR 300/mt over all distance slabs ranging from 0 to more than 700 kms.
Now, in the latest revision the DBC has been abolished completely.
Bottlenecks Associated with DFP
The DFP did not help the Indian railways as unscrupulous traders diverted their stock marked for domestic market to ports for export purposes. Inadequate internal controls and checks carried out by the railways were the main deficiencies in implementation of DFP. Non/partial submission of necessary documents and shortcomings in rake allotment systems were other hindrances associated with DFP. According to a report of Comptroller and Auditor General (CAG) of India, railways suffered a loss of INR 290 billion due to mismanagement of DFP policy of iron ore & pellets in 5 years from May’08-Sept’13.
How will DFP Abolition Impact Iron Ore Exports from India?
In order to assess the impact of elimination of DFP, Steel 360 spoke to a few iron ore exporters. East India based iron ore exporters are expected to benefit the most from DFP removal on iron ore export as they were struggling with high freight rates which made exports non-viable for them. Now with removal of DFP, the scenario has pacified to some extent.
An East India based iron ore exporter shared, “This is a welcome move by the Indian government. However, sudden fall in Chinese iron ore prices has ruined the situation. As far as iron ore export from Odisha is concerned, export shipments of low grade fines (less than Fe 57%) may be seen as the material does not attract any export duty.”
On one hand, removal of DFP brought benefit of around USD 5/mt, while on the other hand, prices tumbled by USD 11/mt in the 1st half of May’16. Thus, export viability appears to be thin amid declining prices.
Steel 360 charted out a comparison of the expenses incurred in export of low grade fines from Odisha.
It can be inferred from the above table that FoB cost of Indian iron ore fines (Fe 57%) would stand at USD 31/mt. While going as per index, prices for Indian fines (Fe 57%) was seen at USD 30/mt, FoB India on 16 May’16. Thus both the values are almost at par.
Fall in Chinese Iron Ore Prices Sully the Mood
After exhibiting a northward movement continuously for four months since Jan’16, global iron ore prices fell sharply in 1st half of May’16. Monthly average index for Fe 62% fines had gained USD 20/mt by Apr’16 since beginning of 2016. Reason behind the rally in global iron ore prices observed earlier this year was increase in output by Chinese steel mills in anticipation of some government measures that may boost demand in infrastructure and construction sectors.
In the first half of May’16, iron ore prices in China tumbled by nearly USD 11. As per reports, Chinese policy makers will keep on stressing on reducing oversupply in the steel market. Amid prevailing sentiments and reduced buying interest, iron & steel prices declined in the 1st half of May. This put brakes on development of optimistic sentiments in the Indian iron ore exporters.
On 16 May’16, Indian iron ore fines (Fe 57%) index was assessed at USD 38/mt, CFR China against USD 44/mt CFR China a month ago. Current vessel freight from India to China is around USD 7-9/mt. Hence, if we talk about the FoB value, it would come to around USD 29-31/mt FoB west coast of India. However, as per trade sources report to Steel 360, the recent deals were heard to have been closed at USD 39-41/mt, FoB India (USD 45- 46/mt, CFR China).
Thus, it can be concluded from above stances that removal of DFP will surely give some relief to eastern India based iron ore exporters to some extent but another key factor that is presently governing the situation is – strength in international prices.
Source: Steel 360 Magazine June’16 Issue