india's riddle just the trick:

Dryblower

Monday, May 16, 2005
STRONGER for longer is a theory which some observers of the commodity market find compelling, simply because of the China factor. Dryblower, being a cynic by nature and an observer of too many commodity cycles, has not been a fully paid-up member of this perpetual-boom theory of life.

But, every now and then a little factoid floats to the surface and even the most jaundiced of commentators has to say "wow, that's new".

Just such an item drifted across Dryblower's desk last week, and even this hardened old scribbler has to say that it is a powerful indicator that "stronger for longer" might not be such a silly theory.

The event which triggered the wow reaction was a report from India that one of its states is moving to ban iron ore exports. Actually, it goes further than that because the head of a domestic steel company even went as far as describing iron ore exports as a "national crime".

For anyone living in a freewheeling society with a vibrant, free enterprise economy this sort of thing is staggering to say the least. Not only does it sound astonishingly stupid, it even sounds like a one-way ticket to the poor house – which is pretty much where a lot of India resides anyway.

Having snatched a peak at the headline, Dryblower decided to dig a bit deeper looking for answers to a few questions, such as (a) what's the logic of an export ban, and (b) what are the long term consequences.

The first issue cuts to the heart of India's founding political philosophy of self-sufficiency, a sort of India-for-the-Indians approach to life. It's why a lot of the country still drives cars designed by the Morris Motor Company in 1953.

In the iron ore example the argument is that precious natural resources should be kept for local consumption sometime in the future, and a belief that there is a finite resource which could be quickly consumed by one of India's archenemies, China.

So much for the export ban theory of life. What about (b), what does it mean?

This, obviously, is where things get interesting because if India withdraws from the export market it leaves a yawning gap for countries less hung up by their history or desire to be a big steel producer.

The winners from a tighter market, and India is currently one of the world's major iron ore exporters, are Australia, Brazil and South Africa. More specifically, in Australia it means that existing producers are given an even better future outlook, and potential new entrants in the market can confidently expect to win export contracts.

Which comes back to the question of how serious is the Indian export ban debate, or is it a flash in the pan. Dryblower can't answer that, though some of the comments from politicians and business leaders are exceptionally sharp.

The secretary of mines in Orissa State, Bhaskar Chatterjee, even went as far as telling the Wall Street Journal that he wants local iron ore kept for the local steel industry. "It's state policy," he said.

As a final observation it is worth noting that the biggest theoretical loser from all this is actually the biggest winner. One of the iron ore deposits in question is a joint venture between Posco of Korea and Australia's own BHP Billiton – which produces an equation which sees no new iron ore export business in India, but bumper prices for Australian ore, a scenario which adds a fresh layer of confidence to the stronger for longer argument.