The government's decision to lean on primary steel producers to fight inflation while doing precious little to curb iron ore prices has produced an anomalous situation. Earlier this month steel producers agreed to hold prices for three months and roll back some of the recent price rises.

But no such exercise has been undertaken for iron ore, the key raw material needed to produce steel and accounting for as much as 35 per cent of steel manufacturers' costs. Most of the steel makers do not have captive iron ore mines and so buy their iron ore from the state-owned National Mineral [Get Quote] Development Corporation, which also comes under the steel ministry.

Thus, in curbing inflation, one part of the ministry does not appear to want to know what another part of it does. NMDC, ever since it raised iron ore prices for domestic steel firms by a massive 47 per cent last October, is charging its domestic customers a massive 97-231 per cent more than it is charging its major overseas customers like Japanese and Korean steel mills.

Perhaps the last straw for Indian steel producers is a new export duty of 5-15 per cent, which prevents them from getting something out of the higher prices prevailing internationally. Little wonder that steel firms are foreseeing a clear decline in their margins.

The steel ministry has obvious answers to these points. Iron ore prices were raised by a large margin last October, whereas since January steel companies have gone through several price hikes and rollbacks. So they have been able to pass on at least some of the impact of higher iron ore prices though not all as prices of other raw materials like coking coal have also risen sharply.

As for the difference between domestic and foreign prices, the latter is part of long-term selling agreements under which prices are revised every year. NMDC is initiating the process of yearly review, at the end of which the vast difference between domestic and foreign selling prices should narrow considerably.

If they don't disappear altogether that can be because pricing policy is laid out keeping in mind the need to develop and sustain long-term markets which do not come and go along with the boom and bust in commodity prices. Japanese and Korean buyers of iron ore undoubtedly strike a hard bargain but they are veterans at the game and set the benchmarks for global iron ore prices.

With Indian tariff barriers having gone down over time (currently there is no import duty on steel) it is impractical for the Indian government to try to curb domestic prices, except very temporarily, for such a widely traded commodity like steel.

So differences between raw material and finished product prices will narrow once the temporary selling price freeze is over. What will not go away is the permanent unequal status between those like SAIL [Get Quote] and Tata Steel [Get Quote], which have access to captive mines, and those like RINL and Essar Steel [Get Quote], which don't.

This needs correcting by making the process of allocating mines to steel producers transparent and based on open tendering. Once this is done, the time taken to allocate mines will come down. This should happen once the new mining policy is in place.

Indian steel is globally competitive and nothing should be done to take away from this through the imposition of controls and transaction costs.