A blanket ban on mining in Odisha as proposed by the M B Shah Commission may result in a decline of 11 million tonne of captive iron ore output at India’s two leading steel producers – Steel Authority of India Ltd (SAIL) and Tata Steel.
While the public sector steel major SAIL is set to lose 4 million tonne of captive iron ore output, Tata Steel would have to forego 7 million tonne of the steelmaking raw material annually.
A report on iron ore mining by Emkay Global Financial Services Ltd, a city based broking firm, showed that as per its current production capacity of 9.7mtpa, Tata Steel requires around 17 million tonnes per annum (mtpa) of iron ore. At present, its requirements of iron ore are met partly by supplies from Noamundi and Joda (East) mines in Jharkhand and Odisha, respectively.
As per available data, supply of iron ore from Odisha was around 5mt in FY12. Tata Steel produced about 6mt of iron ore in FY12, and the capacity was to be ramped up to around 11mt in FY13 in Odisha. Meanwhile, in Noamundi, total excavations stood at 6.34mt (including 4.84mt of ROM, 0.51mt of waste and 0.99mt of subgrade ore) as against a planned total of 9.94mt.
Assuming that the Noamundi mine would operate at a run rate of around 10mt going forward, about 7mt of iron ore would be required from Odisha for Tata Steel’s plant at Jamshedpur in order to operate at full capacity.
Thus, if captive mining is suspended indefinitely, Tata Steel would experience a shortage of around 7mt of iron ore, which may compel the company to operate only at about 60% utilizations. Also, since it has been in the process of setting up a 6mtpa steel capacity in Odisha, for which iron ore is likely to be supplied from the Khandband mine (Odisha), a ban on captive mining might delay the project.
Iron ore for SAIL’s Rourkela Steel Plant (RSP) is supplied from its Bolani and Barsuan mines in Odisha. As per available data, the total supply from these two mines would be around 5.9 mt in FY13. Meanwhile, RSP is currently expanding its crude steel capacity from 2.17mtpa to 4.2mtpa, which would imply an increase in iron ore requirement from around 4mtpa to 7mtpa.
According to the latest communication from the company management, SAIL has been scaling up the mining capacity of its Bolani mine from about 4mtpa to around 10mtpa, while that of the Barsuan mine from 3.3mtpa to 6.5mtpa, for which it has already obtained the requisite clearance from the Ministry of Environment and Forests (MoEF).
Thus, if captive miners are compelled to discontinue mining, SAIL would confront a major problem in operating its steel mill in Rourkela. Though the company has mines in the nearby state of Jharkhand and can feed RSP, transportation costs would have to be taken care of.
The specific impact on steel companies with captive ore consumption would be similar to what was discussed above. However, the impact on the industry would be far more severe, as the same procedure, which was followed in Karnataka and Goa, is likely to be followed in Odisha, including a detailed investigation by the CEC, intervention by the Indian Council of Research & Education (ICFRE), preparation and implementation of the R&R study, among others. Going by the past experience, it would take at least a year for the issue to be resolved.
This would result in a substantial shortage of iron ore to the tune of around 45mtpa for 20-25mt steel and pellet plants in the Eastern region. While Chhattisgarh-based units would have a choice to source iron ore from NMDC, West Bengal and Odisha-based units would find it difficult to run their operations.
Moreover, the state government had signed MOUs for 50mtpa steel projects, and recently renewed MOUs with 11 firms. If a blanket ban is imposed, it would be very difficult to secure iron ore for these projects, unless some alternative arrangement or allocation is made. This, in turn, would result in project delays and cost escalations.
Prices to remain firm
In case a ban is imposed on mining activities, chances of iron ore prices moving up would be greater, since there would be supply shortages once selling of recent stocks is over. Though, there is no authentic information on the actual requirement of iron ore by steel mines in Odisha, however, based on an interaction with the Director of Mines, Odisha, it could be less than 50 mt. Thus, in case of an extreme situation, the iron ore stock in Odisha can take care of the local demand. However, demand from other states might not be met fully. This is likely to benefit iron ore mining companies outside the state, including NMDC, as far as pricing is concerned.
Also, the state government’s recent directive to sell 50% of ore within the state eventually should help miners outside Odisha to find new customers. This is also likely to strengthen ore prices. Currently 62% Fe grade ore is fetching between Rs 1,800 and 2,000 a tonne.
On the other hand, a shortage of iron ore is likely to put pressure on user industries that are dependent on Odisha ore. Several sponge iron units are on the verge of closure. This, in turn, is likely to help steel prices to stabilize if not improve, especially for long products in the short-to-medium term at such times when demand remains sluggish. At present, the sponge iron prices in different important centres are quoting within the range of Rs 18,500- 19,500 a tonne.
Exports to decline further
Due to a hike in export duty and other restrictions, the contribution of iron ore (value) to total exports from India dipped from around 4% in H2FY10 to about 1.5%, on an average, till May 2012. With an accelerated pace, the same decreased to 0.41% in March 2013. Most of this decline in export value can be attributed to decrease in volumes, which dropped 68% to 16.34 mt during April-January. Since the widening current account deficit has become one of the serious concerns for the government and the Reserve Bank of India (RBI), a further decline in iron ore exports would compound the problem.
|Mining operations of Tata Steel in Odisha|
|Production (million tonnes)|
|Mining operations of SAIL in Odisha|
|Production (million tonnes)|