OREANDA-NEWS. August 1, 2011. It is observed that the subject of the report of the Hon'ble Lokayukta of Karnataka State, is being covered by the print and electronic media. In order to understand the nuances of the pricing mechanism of iron ore in the international and domestic sector, this press note is being released for better appreciation and reporting, which would help the common man to understand the issues. In this connection the following points are brought out:

1.         NMDC is the largest producer of iron ore in India. Its mines are located at Bailadila in the State of Chhattisgarh and at Donimalai in the State of Karnataka.

2.         The Company sells more than 90% of its production in the domestic market. Most of the domestic sales are earmarked to its long term customers who have linkages with NMDC. Accordingly, NMDC exports less than 10% of its production.

3.         Most of the production is earmarked for the long term customers of the Company in the domestic as well as in the international sectors.

4.         In the international sector, the quantity exported is mainly based upon the long term contracts. The export contracts are entered through MMTC, the canalizing agency of Government of India, to the Japanese and South Korean Steel Mills. These contracts are usually for a period of 5 years, which is based upon the approvals of the Government of India.

5.         The pricing mechanism of the international trade of iron ore is traditionally based upon the outcome of negotiations between the major customers like the Japanese Steel Mills, Korea, etc, and large

suppliers from Australia and Brazil and the increase / decrease of FOB prices are fixed for each country. Generally, these FOB price increase/decrease is also offered on long term basis to India (MMTC).

6.         The contract for the period 2006-07 to 2010-11 was also drawn up on the above lines.

7.         Upon the entry of China as a large importer of iron ore, there emerged

another mechanism in the international trade which is popularly called as the "spot prices". As the name suggests, these prices are of very short term in nature and had introduced very high price volatility in the market, which extended even to ship to ship basis. In other words, at some point of time the spot prices were higher than the long term prices and at other point of time, the long term prices were higher than the spot prices.

8.         World wide, this price volatility led to the quarterly pricing mechanism. Accordingly, NMDC has also changed its pricing policy from annual pricing to quarterly pricing, factoring in the spot prices as well.

The issues brought out in the Lokayukta Report read with the above indicate to the following:

a)         The FOB prices quoted by Lokayukta in its report are the spot prices at which the spot market sale to China was carried out at one point of time.

b)         As has been explained above, the basis for pricing by NMDC for its export in the international market was the outcome of the negotiations between Japanese Steel Mills on one hand and the Australian and Brazilian mines on the other hand.

c)         In the year 2007-08, the long term price for sale of iron ore from Donimalai was USD  63.51/DLT and USD  50.99/DLT for lumps and fines respectively for the entire year. As, the long term prices were valid for the whole year, the international long term prices for the period 2007-08 remained at the contracted prices, even though the spot prices varied between USD  60 /T to USD  168/T during the year.

d)         However, at the end of the year 2008 itself, the spot prices dropped to the range of USD 65/T to USD 75/T for iron ore fines where as the long term prices for 2008-09 at which NMDC sold its product to Japan and South Korea had been USD  92/T.

It would be appreciated that the entire long term contracts and its pricing on year to year basis was based upon the transparent policies and as per established world wide benchmarks.

It is hoped that you would be able to put across to your esteemed viewers and readers, the difference between the long term and spot prices for their better appreciation.