With the deadline of March 31, 2020 fast approaching when mining leases of over 40 iron ore mines accounting for about 60 million tonnes of ore in India will expire, all eyes are on the auction of 18 of these mines from Odisha over the next few months. Iron ore is one of the key ingredients for making steel.
Odisha accounts for about 50-55 per cent of India's 210 million tonne iron ore production and leases of at least 30 of its mines expire at the end of this fiscal. A timely auction process and subsequent transfer to the winner is essential to ensure there is no disruption in the availability of ore to the domestic steel industry.
Early indications suggest that the new auction rule that is being implemented as part of the amendments in the Mines and Minerals (Decelopment and Regulation) Act will result in an increase in cost by at least 30-40 per cent for non integrated steel makers. So far about 24 iron ore blocks with estimated reserves of 640 million tonne of ore have been auctioned over the past three years (up to November 19). A majority of them (18) were in Karnataka with reserves of more than 330 million tonne of ore. But leases for only four of these blocks were set to expire this March. In the state, average bid premiums were 93 per cent of the base price laying the marker for the auction in Odisha.
"We expect bidding for the Odisha mines to be aggressive. That's because the first lot of 10 mines where auction was later annulled had seen aggression, with 177 bids from a total of 58 companies," said a report by CRISIL Research. "Iron ore prices are expected to rise depending on the bid premiums quoted in the auction. Our base case is the premium would be more than 40 percent for most mines, based on the high reserve price already set. That would potentially translate into a price hike of 30-40 per cent after operations begin."
Over the last few months, the government has taken a number of steps to ensure a smooth transition and minimal disruption in supplies. In late-September, the Mineral (Mining by Government Company) Rules, 2015, were amended to ensure that Donimalai, one of the biggest mines owned by India's largest miner state-owned National Mineral Development Corporation, is not put up for auction. Further, the government also allowed state-run Steel Authority of India (SAIL) to sell 25 per cent of iron ore produced from its captive mines - it was not allowed to do so earlier - as also dispose old stock of about 162 million tonnes of low-grade ore lying at its pitheads across the country. In addition to that the government in Odisha has allowed merchant miners to stock ore for up to two years at their storage depots and stockyards instead of the earlier limit of six months.
Yet, cost for steel companies is almost certain to rise and at a time when demand for the commodity in India is weak due to the overall downturn in the economy. Subsequent impact on the bottom line is inevitable.
"Profitability of steel makers is expected to weaken this fiscal (as already seen in the first half) because of lower steel prices and weak volumes despite softening coal prices. Next fiscal, we expect steel prices to be range-bound with a downward bias following global cues," CRISIL said. "While coking coal prices are expected to decline next fiscal, rising iron ore cost after auction will weigh on the spreads of non-integrated players."