Merchant miners may confront losses after Odisha's auctions

Intense bidding at the recently concluded online auctions of 19 iron and manganese ore blocks in Odisha has cast doubts on the viability of merchant mine operations in the state.

The highest premium quoted at electronic auctions of the merchant mine blocks stood at 154 per cent for Siljora-Kalimati mine now under the leasehold of M L Rungta. The mine has been bagged by Debabrata Behera. Auctions witnessed a frenetic bidding activity with average premium being 106 per cent. Sajjan Jindal controlled JSW Steel was the key disruptor at Odisha's mine auctions, pocketing four mines, three of them for merchant mining purpose. ArcelorMittal  won the Thakurani merchant block, quoting a premium of 107.55 per cent. Even Fomento  Resources, one of Goa's leading merchant lessees could wrest control of Nadidihi iron ore mine after a steep premium of 141.25 per cent.

The lease validity of these 19 merchant mine blocks ceases by March 31, 2020. The Centre's recent Ordinance has allowed extension of all statutory clearances for these mines, thus paving the way for seamless transfer in ownership and continuity in mining operations.

While the Ordinance has bulldozed fears of disruption in iron ore supplies, the viability of merchant producers is  at stake.

“Any mine bagged at a premium in excess of 100 per cent would inevitably run into losses for merchant producers. The captive miners can absorb the enhanced costs into their  finished steel products. They can also invest in slurry pipelines to cut costs of ore transportation. But the plight of merchant miners is disturbing”, said a leading merchant iron ore producer.

According to industry estimates, an iron ore mine secured after frenzied competition at online auctions would inexorably pile up losses for merchant miners. Loss to the miners is pegged between Rs 1200 and Rs 1400 per tonne for a mine block won after  quoting premium in the range of 140-150 per cent.

“If the new miner is not able to produce and defaults or surrenders the mines, it will result in the government losing on the royalty and premium and the ultimate loser will be the state exchequer.  Also, there will be a supply shortage which will affect the domestic steel industry”, said an industry source.

Logically, merchant miners would incur losses, feels another standalone miner. And, the possibility of an anticipated crash in iron ore fines prices by 40-50 per cent because of  a glut in supplies would make operations tougher for them.

“Initially, merchant miners may look to extract more lumpy ore to bolster their realizations. Still, their viability will be in jeopardy as nearly 70 per cent of the mined ore is fines”, he said.

Unless the government rolls back  30 per cent  duty on iron ore exports, merchant miners would find it profoundly difficult to compete with Brazil or Australia in the international seaborne trade. Presently, iron ore fines up to 58 per cent Fe (iron) grade is  exempted from export duty. Higher grade fines attract 30 per cent duty.

Volatile international iron ore prices, too, will magnify woes for the exporters. Demand for iron ore among China's steel mills is projected to soften owing to fragile recovery of  finished  steel demand. In its monthly market analysis, the China Iron & Steel Association said imported price will trend downward since most domestic  steel makers are cutting their production.