Increase in Karnataka iron ore mining cap brings relief to steel firms

Not only would availability improve, but it would cut transportation costs

The increase in the cap on iron ore mining in Karnataka brings relief for the state’s steelmakers such as JSW Steel, Kalyani Steel, Kirloskar Ferrous, as well as smaller steel producers and pipe manufacturers, as they stand to benefit on account of increased availability of the input used in steelmaking. The Supreme Court’s decision on Thursday means the miners in the state can now extract 35 million tonnes (mt) of iron ore a year, against 30 mt earlier, an increase of 17 per cent. 

The limited availability of iron ore has been a cause of concern for the state’s steelmakers. So far, to meet the requirement of iron ore, steel producers had to resort to external supplies, which meant higher transportation costs. In fact, many were also forced to hold back capacity expansion plans. 

Though auctions for some mines had taken place — and steel manufacturers were allocated mines — as the mining limit remained unchanged, the benefits of mine allocation did not accrue. 

JSW Steel, for instance, had been allocated five mines (won through auctions), and two captive mines. It can now make the mines operational and benefit from captive ore instead of external supplies, say analysts. 

So, the increase in the mining limit would lead to twin benefits. First, increased iron ore availability as more mines start production, and second, cost savings (lower transportation and logistics costs) and benefits of captive ore, say analysts. 

The gains look meaningful as the development comes at a time when global iron ore prices are rising, and even iron ore miners such as NMDC have taken price hikes.

The 62 per cent Fe ore prices ex-China, which had gone down to sub-$60 a tonne levels in end-October, have now crossed $70 levels. NMDC has hiked prices by 12-13 per cent for lumps and fines (by Rs 2,600 and Rs 2,260, respectively) for December. Thus, as raw material costs are moving up, steel producers have had to pay a higher premium for iron ore due to limited availability. These premiums, too, would now come down. 

Overall pricing outlook for iron ore remains stable, says Goutam Chakraborty of Emkay Global, and the event will not lead to a decline in ore prices, but premiums will reduce and the companies would benefit from lower costs. Chakraborty, thus sees the development as positive for all steel players in the state, and among larger players, JSW Steel. 

The company is expected to benefit up to Rs 500 crore in logistics costs, and another Rs 100-150 crore in input costs savings, estimate analysts. 

JSW Steel has already been on the buy list of most analysts. Those at Edelweiss, in their November note, had said that despite significant run-up in the stock price, they expected more gains. The possible stressed assets’ acquisition may be further value-accretive for JSW Steel, depending on the price of the acquisition, the analysts say. For now, the Street is watchful on the developments and the outcome of the stressed assets’ sale with JSW being in the race. 

Consequently, the stock is moving sideways, say analysts.