As the Indian iron ore mining industry tries to gradually limp back to normalcy, after bans were enforced in several Indian states to curb illegal activities, several challenges are yet to be overcome before miners and steel companies breathe easy.
In the latest development, which is likely to cause heartburn to miners, the Cabinet Committee of Economic Affairs approved hiking the rate of royalty on minerals, including iron ore and bauxite, on August 20. The move will result in greater revenues for states, but will either eat into the margins of miners, or result in higher costs for steel and aluminium companies which procure these minerals.
Rate of royalty on iron ore was hiked to 15% from 10% earlier. In all, the rates of royalty on 23 minerals mined in India was increased and this would result in additional revenues to the tune of around R4,000 crore for states. Odisha, Jharkhand, Goa and Karnataka are some of India?s mineral rich states that will benefit from the decision.
This comes at a time when merchant iron ore miners are already struggling with significant production cuts owing to restrictions put in place on mining of the mineral by the Supreme Court, and are uncertain if some of their earlier customers will return to purchase from them.
In Goa (the biggest exporter of iron ore in India), for instance, the Supreme Court has allowed mining operations to restart with a cap on production of 20 million tonnes (mt), but the state government is yet to come out with a clear policy for minerals utilisation that will finally clear the decks for operations to resume.
Miners like London-based Vedanta Resources? Indian subsidiary Sesa Sterlite, which has iron ore mining operations in Goa, expect mining activities to resume after the current monsoon season comes to an end in the second half of the fiscal.
Vedanta?s chairman Anil Agarwal acknowledged, in an in-house interview published in the company?s 2013-14 annual report, that concerns surrounding iron ore mining in Goa were a result of the several small, unorganised miners mushrooming in the state and trying to take advantage of an upswing in prices of the commodity globally, spurred by Chinese steel demand.
Even when production resumes, Goa miners will have to figure out a way to reclaim their traditional international markets (Japan, South Korea and China) that are being catered to by counterparts from other countries like Australia and Brazil in their absence.
?As companies in Australia, Brazil, and South Africa and perhaps even other nations rush to fill in the supply void with India?s export partners such as China, Japan, Korea and certain European nations, the likelihood of regaining these markets recedes with every day that mining remains suspended in Goa,? a white paper by Goa Mineral Ore Exporters? Association (GMOEA) says.
?Our loss has been somebody else?s gain,? says Glen Kalavampara, GMOEA?s secretary. ?It would be quite a challenge to get back the customers we have lost in the international market, but we have to try.?
The new cap of 20mt on iron ore excavation and an existing 30% export duty means that Goa?s iron ore producers will have lesser volume to sell to the international market and margins will take a hit even when production resumes.
Asked about the possibility of selling greater amount of iron ore to domestic steelmakers, if international customers do not return to the table, Kalavampara said that there has been no domestic demand for the grade of iron ore that Goa produces, which is why they have been exporting the commodity all this while.
But Seshagiri Rao, joint MD and group CFO of JSW Steel says that steelmaking companies are willing to utilise Goan iron ore, but the cost at which it is available isn?t viable.
Two tonnes of low grade iron ore, of the kind that Goa produces, are needed to make one tonne of high grade ore, after subjecting them to a process called beneficiation. Inclusive of costs such as transportation, the price of two tonnes of Goan iron ore works out to R4,800-5,000 per tonne (exclusive of taxes). JSW Steel has to additionally spend R200 crore to service the debt burden for a R1,000 crore-ore beneficiation plant, like the one it has set up in Dolvi, Maharashtra, Rao explained.
?This is more than the cost of imported ore.? Rao said, and indicated that if Goan miners were willing to reduce the high profit margins at which they used to operate, it could be a win-win situation for all.
There are challenges elsewhere as well.
While the Odisha government has allowed some of the mines in the state to resume iron ore production, the issue of hefty penalties levied on companies like Tata Steel and Aditya Birla Group?s Essel Mining are yet to be resolved.
Odisha?s decision to allow eight mines to restart operations has come as a welcome development, especially for steelmakers like Tata Steel, which relies pretty heavily on iron ore from the state for its steelmaking operations at Jamshedpur. These mines were part of the 26 that were shut down following a Supreme Court order.
