Pressure on JSW Steel's margins

Cost of output rises with ore having to be got from other states for Karnataka unit

JSW Steel is facing pressure on its margins, with the cost of production having risen considerably, owing to the high base price for iron ore at e-auctions in Karnataka, apart from availability and quality issues.

The cost of production for the company, the country’s largest steel manufacturer in the private sector, has gone up by Rs 4,000 a tonne in recent days, as it is forced to procure ore from neighbouring states.

The company requires 18-20 million tonnes of iron ore in a year to operate its 11-mt per annum (mtpa) steel factory at Toranagallu in Bellary district. Due to shortage of good quality iron ore in Karnataka, the company is importing ore from Chhattisgarh, Jharkhand and Odisha.

“Our cost of production has gone up by Rs 4,000 a tonne due to the very high base price of iron ore at the e-auctions; the quality of ore is also very poor. Our margins are under pressure and the poor quality ore is affecting production. As a result, we have reduced the capacity utilisation to 68-70 per cent recently,” Vinod Nowal, director and chief executive officer, told Business Standard.

Karnataka iron ore update

• On the approval of Reclamation & Rehabilitation (R&R) plans by Central Empowered Committee, three mines in category ‘A’ (capacity of 1.4 mtpa) have restarted production. Eight mines (capacity of 3.3 mtpa) are in various stages of approval and are expected to commence production during the Oct-Dec quarter
• The R&R plans for 3 mines in category ‘B’ are approved. The R&R plans are under preparation for remaining mines in this category. However, the Supreme Court has stipulated certain conditions for category ‘B’ mines to consider re-commencement of mining
• The CEC has recommended to cancel Category ‘C’ mines and auction them to end users

Earlier this year, the company was operating its furnaces at 80 per cent of the capacity. It had targeted nine mt steel production for 2012-13. During the first half of this financial year, JSW Steel produced 4.31 million tonnes of crude steel showing a year-on-year growth of 26 per cent (see table). “The landed cost per tonne bought at e-auctions in Karnataka is around Rs 6,000 a tonne. Though the base price is low in those states (from where the ore is being brought to Karnataka), we are paying Rs 2,000 a tonne additional on freight for that ore. This has impacted our margins,” said Nowal.

NMDC, the central government-owned mining company from where the ore put up for e-auction in Karnataka comes from, is free to fix its own base price in these. It is offering ore lumps for a base price of Rs 4,900 a tonne; the base price for ore from other mines is Rs 2,400 a tonne. Over and above this, the company is required to pay the final bid price and 10 per cent royalty, 12 per cent forest development tax and 5.5 per cent value-added tax to the state government.

The availability of good quality iron ore has declined considerably in Karnataka in the recent months due to suspension of mining following directions of the Supreme Court. Though the court permitted resumption of over a dozen mines three months earlier, hardly four have re-commenced mining and the combined output is estimated at two mtpa.

Nowal said the company has been daily bringing in two rail rakes (about 8,000 tonnes) of iron ore from the other states mentioned, despite the higher freight rates.

He said the shortage of ore had resulted in a rise in prices for all buyers. As everyone is rushing to buy the limited quantity of ore, the prices have gone up compared to international levels.

The company has filed an appeal in the Supreme Court to give directions for increasing the supply of the raw material and give permission to expired leases to resume operations.