Mines bill to up production costs for Tata Steel, SAIL, Hindalco

Whether integrated steel producers will be able to pass on increased cost will be watched, say analysts

The mines Bill passed by the Rajya Sabha on Friday will push up the cost of production of Tata Steel, Steel Authority of India and Hindalco Industries as they pay to set up district mineral foundations.

The foundations will be established by state governments for the benefit of districts affected by mining operations. This would be a new cost head for these companies which could climb as high as their mining royalty, depending on the rates set by state governments, analysts said.

Bauxite, the raw material for aluminium, attracts royalty of 8-9 per cent, while steel companies pay 15 per cent royalty on iron ore. The increased cost for steel companies could be 30 per cent—royalty plus contribution to mineral foundations. Non-ferrous companies could face 16 per cent higher costs.

The mines ministry has sought a distinction between miners granted leases before the commencement of the MMDR Amendment Act 2015 and those granted leases after the law comes into force. Miners granted concessions before the Act will have to pay an amount not exceeding the royalty to the mineral foundations. Miners granted leases after the Act will have to pay into the foundations an amount not exceeding one-third of the royalty.

“Margins of both ferrous and non-ferrous metal producers will be affected by the bill, but the extent of damage is higher for SAIL and Tata Steel than for Hindalco Industries,” said Abhisar Jain, senior analyst with Centrum Broking.

Brokerages are of the view  the Bill augurs well for the mineral industry as the government shifts to auctions for mineral rights. "We believe this could herald a transparent and predictable regulatory environment, which could spur growth and investment in mining," said a Barclays Securities (India) report.

“The bill is positive for companies like JSW Steel and Sesa Sterlite, which can now look to have captive ore sources to attain raw material security. This will  help them bring down their cost of production,” said an analyst with a local brokerage.

Sesa Sterlite is importing bauxite for its 1-million-tonne plant in Lanjigarh.

"JSW Steel sources 50 per cent of its iron ore requirements from imports. The company could look at securing a captive supply once iron ore blocks are put up for auction. This should improve utilisation levels and aid profitability," said Barclays.

“The steel industry has been hit by increased imports and weak demand. Whether companies can pass on the increased cost of production has to be seen,” said an analyst with a local brokerage.