By Our Business Affairs Bureau
BHUBANESWAR/JODA/BARBIL/KOIRA: With Naveen Patnaik led BJD Government in Odisha is missing no stone unturned to complete the mining auction by March 31 this year and 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.
“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.”
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.
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.”
Meanwhile, domestic iron ore prices are set to escalate between 30 and 40 per cent after mining commences again from the lapsing merchant blocks in Odisha following the successful conduct of online auctions.
A study by CRISIL Research illustrates that premium for most of the mines would exceed 40 per cent in a majority of the mines put up for auctions. The assumptions are based on the reserve price set by the Odisha government for auctions of iron ore blocks.
The floor price for almost all blocks save Nuagaon ranges from 15-35 per cent of the sale value of the mineral as estimated by Indian Bureau of Mines (IBM). For Nuagaon block currently under the leasehold of KJS Ahluwalia, the reserve price is pegged at 50 per cent as it contains immense deposits of 790 million tonnes (mt).
The hike in iron ore prices in the aftermath of auctions will hinge on the auction premiums. Last year, domestic prices were half the landed prices, offering the merchant iron ore producers the latitude to raise prices.
CRISIL Research estimates that the landed price for a non-integrated steel maker on the eastern coast to be Rs 3700-3800 per tonne including royalty, freight and other charges. Non-integrated steel manufacturers contributed three-fourths to the nationwide steel output in FY19.
Though bidding for the 20 Odisha mines would be aggressive, the imminent supply disruption would be limited as existing miners have been ramping up production given the upcoming lease expiries, and the auction process that has begun is scheduled to be completed by end of February. However, the government’s decision on extension/non-extension of environmental clearances during the transition period will be a key monitorable for any supply disruption.
While 15 of the 20 mines to be auctioned predominantly have iron ore, three have both iron ore and manganese, while the remaining are primarily manganese reserves. The 18 mines containing iron ore reserves together hold 1600 mt of which 33 per cent (five mines) are reserved for specified end-use (captive usage). All are operative mines whose lease tenure ceases by March 31, 2020.
The report by CRISIL feels that high bidding in Karnataka has set the precedent for Odisha. Of the mines auctioned in Karnataka, JSW Steel won half. The weighted average bid premium for the 18 auctioned mines was 93 per cent with bids ranging from 37 per cent to as high as 130 per cent.
