A Delay In Mining Auctions Could Disrupt A Third Of India’s Iron Ore Supply

Nearly a third of iron ore supplies to domestic steel mills could be disrupted if the auction of 33 mines whose leases are slated to expire in March next year are not held in time.

These mines contribute about 28 percent of the country’s total production of iron ore, a key raw material used in steelmaking, according to a report by the Ministry of Mines. The majority of these are located in Odisha (16 licences set to expire), followed by Karnataka (eight) and Jharkhand (five).

Among the 16 working licences of India’s largest iron-ore producing state of Odisha, Serajuddin and Rungta mines produced 6 million tonnes and 11 million tonnes, respectively, last year, a report by SteelMint said. Overall, these two miners have 2.9 percent and 11.65 percent share, respectively, of India’s total iron ore market, it said.

What Sparked Fears Of Delay

The Odisha government was set to auction the 16 mines by March this year but deferred the timeline as the state awaits clarity on the maximum area a lessee can hold, according to a Business Standard report. But the bigger worry is that the new lessee has to apply afresh for environment and forest clearance after the re-allocation of an expired mine. This process could take two to three years before the mine can be made operational.

To avoid the potential disruption, the central government advised the states to start auctions by July 1 this year so that the incoming miner has enough time to make the mine functional, according to the Ministry of Mines report.

“Adherence to the July timeline is very essential and sacrosanct to the iron ore auction process and the (mines) ministry is in talks with the Environment and Forest Ministry to allow new lessee to operate till it acquires the clearance, a process which usually takes two to three years,” Anil Mukim, secretary at Ministry of Mines, told BloombergQuint.

Agreed former Steel Secretary Aruna Sharma. “It’s important to adhere to the timeline at a time the fifth round of coal auction has been deferred,” she said, adding that in case of a delay the central government may extend approvals for leases to avoid any potential disruption. She suggested that the new miners shouldn’t be mandated to acquire fresh environment clearances as this would increase their production period by two years.

An email sent to Deepak Kumar Mohanty, director (mines), Odisha, remained unanswered.

NMDC Stands To Gain

But the potential disruption in iron ore supply will have one beneficiary: state-run NMDC Ltd., India’s largest producer of iron ore, since its lease will continue to be operational, according to Niteen S Dharmawat, co-founder at Aurum Capital. NMDC currently produces 22 million tonnes of the raw material against its capacity of 29 million tonnes.

TRK Rao, commercial director at the state-run miner, is confident of meeting any shortage in supply of iron ore as he expects demand to grow by 4-5 percent next year. Non-integrated steelmakers such as JSW Steel Ltd. will continue to source the raw material as expanding the capacity of steel mills will ensure additional requirement from the company, he said.

Integrated steel producers such as Tata Steel Ltd. and Steel Authority of India Ltd.—that produce their own raw materials—will remain relatively better off if iron ore prices increase due to lack of supply. Besides, Tata Steel will benefit if it manages to win an iron ore block in Odisha that will cater to the needs of Tata Steel BSL (erstwhile Bhushan Steel Ltd.)

Who Will Be Impacted?

Non-integrated steelmakers like Jindal Steel & Power Ltd. and JSW Steel will be impacted by the iron ore shortage if they fail to receive any mine in the auction, according to Edelweiss Research.

“JSW Steel will be impacted the most due to higher iron ore requirement,” said Amit Dixit, assistant vice president (institutional equities) at Edelweiss Research. “Nevertheless, if these companies win the bid, iron ore will come at higher prices given the steep bid for the blocks at Karnataka, which may impact their impact their margins.”

JSW Steel is expected to ramp up its captive iron ore capacity from 3-3.5 million tonnes to 5.2 million tonnes by 2020. Despite that it will continue to source the raw material as it plans to expand its steel capacity to 23 million tonnes by next year, which will require 36.8 million tonnes of iron ore, according to BloombergQuint’s calculations.

Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel, said its Dolvi unit procures a significant portion of iron ore from Odisha. The company, therefore, will actively participate in the auctions in Odisha either for Dolvi or to supplement the needs of Vijayanagar plant in Salem, he had said during the steelmaker’s third quarter earnings conference call.

Another worry for non-integrated steelmakers is lack of resolution for NMDC’s Donimalai mine in Karnataka. The public sector miner in November suspended the production of iron ore after the state government imposed 80 percent premium on the ore sales from the mine. If the production doesn’t resume, steel players may face additional raw material shortage, especially since leases are set to expire in Odisha and Karnataka, Dharmawat, co-founder of Aurum Capital, told BloombergQuint.

Counterpoint

Not everyone agrees that the auction of mines, even if delayed, will have an impact.

Analysts from CARE Ratings and Crisil expect the delay in mine auction, if any, to have limited impact on iron ore production as a surplus will be generated before the licences expire.

“It is too early to see any disruption in the iron ore industry since these mines are unlikely to shut down as the government might give a moratorium period to private miners to operate after the expiry of their leases,” Ritesh Shah, research analyst at Investsec, said.

CARE Ratings expects production in Odisha and Karnataka, barring the Donimalai mine, to increase 10 percent next year. Also, according to Crisil, the merchant miners are expected to raise output before the deadline, adding to the existing stockpile of 150 million tonnes.