Another big worry for iron ore extractors

JSW to incur additional cost of Rs 240 cr per annum

The increase in royalty on minerals, approved by the Union Cabinet on Wednesday, is likely to be detrimental to the iron ore mining sector at a time when production is strictly regulated across states.

Miners in Karnataka and Goa cannot increase production to absorb the higher royalty outgo, as a Supreme Court-appointed body regulates their annual production. As a result, they might increase prices in the domestic market.

The new royalty rates are yet to be notified.

Some iron ore mines in Karnataka have, however, expressed fear of a cut in ore prices, as steel mills have started importing.

Mines in Odisha, Goa and Karnataka are yet to restart mining on a full scale; those operating are keeping prices high. While demand for iron ore from pellet producers varied, that from sponge and steel producers was stable, said OreTeam Research, a Delhi-based iron ore research firm.

Basant Poddar, vice-chairman, Federation of Indian Mineral Industries, said, “We may have to increase selling prices due to the higher outgo towards royalty charges. It remains to be seen how the steel sector absorbs the price rise. The biggest beneficiary of this rate rise will be state governments.”

He doesn’t rule out a limited price cut in the case of Karnataka miners, as they have to sell their produce at e-auctions, where buyers determine sales. “If steel mills refuse to buy our produce at a higher base price at e-auctions, we might have to go for price cuts at subsequent auctions, as mills are now opting to import the ore, rather than using our low-grade ore,” he said.

The rise in royalty will significantly impact the steel sector, especially in Karnataka, where the steel sector pays the royalty, not miners. “This rise means we have to pay an additional Rs 150 a tonne. For us, the cost of production will rise by Rs 250 a tonne on account of the royalty rise. Overall, considering the rupee depreciation, as raw materials are dollar-linked, our production costs will rise by Rs 1,500 a tonne,” said Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel.

He said the company would incur an additional cost of Rs 240 crore a year on account of the increase in royalty. It would take a decision on passing the burden to end-consumers at a later stage, he added.

“The increase in royalty on iron ore from 10 per cent to 15 per cent will lead to an increase of Rs 100-300 a tonne in ore prices for various grades, across the country. In the east, the price rise will be readily absorbed, while in the south and southwest, it will definitely hurt the sentiment, as production costs are already sky-rocketing,” said Prakash Duvvuri, head (research), OreTeam Research.

In Goa, miners were directly dependent on the export market and, given the current low prices in the spot market ($90-95 a tonne), the margins of miners in Goa would be impacted, said a miner. For miners in the state, the margin was likely to fall to just $3 a tonne, Poddar said.

After e-auctions started in Goa, the margins of miners in the state had declined to Rs 200-400 a tonne.

Currently, iron ore prices in Odisha are very high due to closure of the mines in the state. Prices would fall once mining resumed, but once the rise in royalty was notified, miners might either keep the prices stable or raise these by a small margin, Duvvuri said.