Steel producers are staring at a bleak future in iron ore supplies after the lease tenures of merchant mines lapse on March 31, 2020.
Steel manufacturers, especially those without captive leases, fear supply disruptions in ore for 24 to 36 months following the expiry of non-captive mine leases. Since they depend on merchant supplies, the expiry of the leases would shut off 66 per cent of market supplies of iron ore.
“The supply disruption in iron ore is inevitable as the transition from existing to new lessee is not going to be as easy as anticipated. Besides environment clearance (EC) and forest clearance (FC), the mines need over 20 statutory approvals to continue operations. And, the demand-supply imbalance can further jeopardise the already precarious financial health of many steel companies,” said a steel industry source.
The domestic steel industry is largely dependent on iron ore produced in Odisha, which churns out the largest quantum of the mineral. In the last fiscal, the state produced 114 million tonnes (mt), or more than half the nationwide output of 207 mt. Odisha’s iron ore is strategically important since it primarily feeds the steel and other end-user industries, unlike Karnataka and Goa, where exports have held sway.
Iron ore-rich states have already kicked off the process of online auctions of lapsing iron ore blocks. In Karnataka, four blocks put up for online auctions have elicited favourable responses. Odisha has issued Notices Inviting Tender (NIT) and model tender documents for 20 iron ore and manganese leases. It has also notified nine virgin or freehold iron ore blocks. For the first lot of 10 iron ore blocks, the state has received 176 bids from over 60 companies.
But iron ore prices and supply balance will hinge on how swiftly these mines recommence production after expiry of their lease tenures. While the government believes the change in ownership will be seamless and swift as the new leaseholders can carry on with both EC and FC, extended by two years, the steel industry has contested this claim. Steel producers believe mere extension of EC and FC is not the right remedy as mines need an array of clearances beyond EC and FC to stay operative.
Leading industry bodies such as the Indian Steel Association, Federation of Indian Chambers of Commerce & Industry (Ficci), Associated Chambers of Commerce & Industry (Assocham) and Confederation of Indian Industry (CII) are learnt to have made representation to the Prime Minister’s Office to amend the Mines and Minerals- Development & Regulation (MMDR) Act to avert supply disruptions in iron ore.
According to a report by Acuite Research & Ratings, India’s steel sector, particularly sponge iron and secondary steel producers, may face a short-term disruption in their iron ore supplies with the leases of 232 merchant iron ore mines due to expire by March 2020. The expected impact is estimated at 25-30 per cent of the aggregate domestic iron ore supply in H1 of FY21. This will push up lump ore prices, increase working capital requirements and hit the EBITDA (earnings before interest, taxes, depreciation & amortisation) margins in the steel sector which are already under pressure due to subdued domestic demand.