'Profit sharing with displaced people to cost miners dearly'

Global rating agency Fitch today said the new mining law that proposes 26 per cent profit sharing by miners with the project affected people would adversely impact the profitability of steel producers.

"If the proposed legislation is implemented, the profitability of steel producers will be adversely affected," Fitch said in its outlook for the steel sector for 2011.

However, by making displaced people stakeholders in the project, land acquisition may become easier and steel producers may be able to get faster access to captive raw materials, it noted.

In December, a ministerial panel headed by Finance Minister Pranab Mukherjee had approved the new mines bill, Mines and Minerals Development and Regulations Act, 2010 and it will now be taken up by the Cabinet for approval.

Fitch, in its outlook, added that the domestic steel industry is grappling with various environmental issues and this would further delay the capacity addition in the steel industry.

However, the global rating agency kept its outlook for the steel industry as stable for the year, while saying that domestic steel prices will increase in 2011 due to increase in raw material costs and robust domestic demand.

It added that "profit margin for non-integrated producers may be adversely affected as full raw material cost pass-through could be challenging".

However profitability of steel producers with captive iron ore and/or coking coal mines could increase, Fitch noted.

In 2010, domestic steel production is estimated to be about 78 million tonnes as compared to 64.88 MT of 2009.

Fitch added that introduction of quarterly pricing mechanism in 2010 by raw materials producers has led to volatility in prices, resulting in increasing the unpredictability of profit-margins of the steel industry.

"The unpredictability could further increase if the pricing contract shifts to monthly pricing," it added.

Besides this, the global rating agency also said that domestic steel industry will witness overcapacity over the medium-to-long term as another 30-35 million tonnes capacity will be added in next two years.

However, this would not affect the industry this year as growth in steel consumption is expected to outpace production, it noted, while saying that India's steel demand will grow at 7 to 9 per cent over the next two years.

"Steel demand will be further boosted by the rural sector on the back of good monsoons... Moreover, India's per capita consumption of steel at approximately 47 kg compared to global average of 200 kg provides a huge potential for growth," Fitch said.