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Real Economy Check: Royalties, Logistical Costs Hurting Sponge Iron Makers, Says Mahamanav Ispat’s PVS Rao

Rao said the industry is recovering after after the recent slowdown and a relief from the government could boost business.

Coal being loaded inside a steel factory in India. (Photographer: Dhiraj Singh/Bloomberg)
Coal being loaded inside a steel factory in India. (Photographer: Dhiraj Singh/Bloomberg)

Royalties on iron ore paid to the government and logistical costs are hurting Mahamanav Ispat Pvt. Ltd.’s business just when things were starting to look up.

The cost of transporting ore has more than doubled from Rs 300 to Rs 800 per tonne, PVS Rao, managing director at the sponge iron maker, told BloombergQuint. Royalty or tax payments on ore have also increased costs, he said, adding that the green energy cess was adding to the burden.

Mahamanav Ispat is located in Karnataka’s Bellary district where small manufacturers suffered after the 2011 ban on iron ore to curb illegal mining. It also runs some small units in neighbouring areas like Dharwad. The company, according to Rao, struggled to get raw material at optimum costs. Over the years the situation improved, and it now sources ore from NMDC Ltd. and other private miners. Mahamanav Ispat supplies sponge iron, an input in steelmaking, to industries in Andhra Pradesh, Maharashtra, Gujarat and Tamil Nadu and reported a turnover of Rs 85 crore last year.

Real Economy Check: Royalties, Logistical Costs  Hurting  Sponge Iron Makers, Says Mahamanav Ispat’s PVS Rao

Rao said the industry is recovering after after the recent slowdown and a relief from the government could boost business. Reimbursing input taxes such as royalties or at least allowing them to be adjusted in the output or goods and services tax will help players within the industry, he said. “We pay 15 percent in royalties in the manufacturing process.” A reduction in the “expensive” green energy cess or “taking it out altogether” will be welcome as a part of the Union Budget 2020, he said.

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Watch the full conversation with Mahamanav Ispat’s PVS Rao here:

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Here are the edited excerpts of the interview...

Can you tell me a bit about yourself and your company? What do you do and some other details about who your customers are? What’s the kind of growth that you’ve seen in the past?

We are in the manufacturing of sponge iron. Sponge iron is used for steelmaking in the secondary route. Our company was established in 2008 and has been in operation since 2009. Unfortunately, in 2011— when the blanket ban of the mines took place—we faced a lot of problems like getting raw material at an affordable price and adverse market conditions. Then slowly, we came up and now we are getting suitable raw materials. Our turnover was around Rs 85 crore last year.

Now, we manufacture sponge iron and supply to so many industries throughout India; majorly to Hindupur, Hyderabad, Silvassa, and Wada. The material is also going to Gujarat, and Tamil Nadu. We have a capacity of sponge iron here. Majorly, we procure raw material from and other private mine owners. Initially, we had a problem with getting a suitable size of raw materials. The mine owners here, they offer 10 to 40-millimetre size whereas we require 5 to 20-millimetre size for the sponge iron plant.

Slowly, after requesting them, we now get 5 to 20-millimetre size. After this blanket ban, the industry has suffered a lot. Then slowly, all working capital got nullified. Moreover, some of the units are not able to procure 4,000 tonnes of lots which were offered in the e-auction. Then, we requested the NMDC Ltd. and private mine owners to cut the lot size of 1,000 tonnes where even the small industry also can procure it, where we can spend Rs 40-45 lakh at a time. But unfortunately, the bankers did not support us during that period. Some of the major units became NPAs.

Now, in the last one-two years, the industry is reviving and slowly, we now have 54 plants in Karnataka. I am the president of the Karnataka Sponge Iron Manufacturing Association. There are 54 plants in Karnataka, of which nine are not in operation. The remaining, however, have restarted. Our major problem is logistics. From Krishnapattanam, we used to get coal, from 485 kilometres to Bellary.

Can you just tell us a bit about this whole demand situation right now? Because the last six to nine to 12 odd months, I understand have been tough for the metal industry as well. Even though of late we’ve seen in the price uptake but most companies, even in the listed space, have complained of business environment that was not looking good. Can you tell us a bit about what the business environment is, currently? How were the last six months of 2019 for you?

The last six months were not good. Since the last one month, it has picked up. In Bellary, we use coal majorly imported from South Africa. About four-five years ago, because of green energy cess, the clean environment cess has increased to Rs 400 now. Of course, the discussions are going on to take that out in the next budget. But that Rs 400 has been a burden to us. We are importing all our coal from South Africa only. So, Indian coal is not workable here and it is not viable because of the logistics.

The logistics you mentioned is a problem. Can you tell us a bit about that problem? Then I will come to the other issues. Also, this Coal Amendment Act that has been announced, will it ease issues for you?

Definitely, it will. Coal miners will sell the coal to outside parties also, thereby improving the availability of coal and bringing down prices. Imports will also come down. Definitely, there is no doubt about that.

Okay, what about the logistics issue?

Majorly, the industry has been set up here in Karnataka, Bellary region. Because the [iron ore] mines are closeby, it’s about 65 km away from the industry. Unfortunately, it was initially Rs 300 [per tonne] for transport, but now, it has gone up to Rs 800. Civil trucks don’t run here. From Krishnapatnam, our industry is located at 440 km away and we are getting it at Rs 800 for transport, whereas from 65 to 70 km, we are getting the same price Rs 750 to 800 per tonne. To avoid this, we have suggested stockyards at the bottom of the hill. Civil trucks don’t go to the top of the hill. So, we asked the government and monitoring committee to do this, where the monitoring is happening. We asked them to provide the stockyards at the ground level of the mines hill station so that we can arrange civil trucks and other costs of production will come down by Rs 700 per tonne.

Do you think a resolution of that nature or some other resolution will come about soon? Also, are there any other difficulties that you think you are facing because of regulatory issues or otherwise which can be eased? Anything in terms of rules and regulations which have changed, taxation for filing of papers, etc., which if changed, could help you for the better or help the industry for the better?

That is not a problem but one thing we want to express is that even though they say cess is only one tax, but we have been paying 15 percent royalty and other things. What my request is, whatever the taxes we are paying other than GST should be reimbursed. We pay 15 percent in royalties in the manufacturing process. So, we should be able to take the input on that. Currently, we are not able to take that, which has increased our cost—15 percent of the royalty. Previously, it was 10 percent. From 2014 onwards, it has been 15 percent.

These cost increases are not a pass-through for you? Does it impact your margins?

Definitely, it impacts.

Can you tell us whether the last two years, I heard mention that out of the 43 or 53 units, 9 are not functional and the others are functional. Has this number improved, or has it worsened? What about your own company? What is happening with regards to credit availability to borrowing costs etc.?

Currently, we are enjoying only CC limits. There is no problem with bankers, but interest rates have been going up continuously for the last one year. It was 10.65 percent previously, now it went up to 12.35 percent. Unfortunately, those who have become NPAs; from Rs 140 crore, they have settled at Rs 23 crore. For those you are who are paying properly like our company, they are not reducing the interest rates and they are not at all bothered. This has to be looked into.

Have you not had conversations with the bankers that if you are indeed doing your work well and paying the dues on time, shouldn’t your rates come off? Are there no other sources of funding available that could be cheaper from alternate banks or otherwise?

It is available. Other banks are coming forward now to give at less than 10 percent also. But they are saying that the steel industry is not one of their top priorities. So, they have their doubts about that. So, they are not taking over the existing loans.

How do you see the next 12 months to be like? Do you think there will be a pickup in business momentum?

Definitely the steel business will be better. Sponge will be even better than steel. Why? Because there is an increase in steel production while there is no increase in sponge production. Whatever the capacity installed is, that is getting revived. No expansions are taking place in sponge iron and pollution issues have also made permits harder to get. Iron ore, the main raw material, is also difficult to procure. So, definitely for sponge, it is better than steel. However, steel is also good.

What about manpower issues? We hear sporadically, things that companies are not getting the desired manpower. So, while there are fewer jobs in the country and more manpower available, the right kind of manpower is not available. Do you face that issue as well?

As far as the sponge iron plant is concerned, we give employment to rural people only. So, we have taken people from rural villages and not skilled people. So, for sponge iron, there is no issue of manpower availability. But rightly said, skilled manpower of the kind that bigger companies engage may not be available. So, that is the issue.

One thing that you would want to see in the budget? You mentioned the two or three things that should be looked into. Borrowing costs, among others, some duties, some royalties that you are paying. What is the one thing that the budget can do for you?

We don’t know whether this voice has reached to them or not or will reach or not. But definitely, they give the reimbursement of the input taxes like royalty. If they allow that to be adjusted in the output and the GST, that will be really helpful for our industry. Green energy cess—initially it was Rs 50, now, it is Rs 400. If they can revive and reduce or take it out, that is also good for our industry definitely. Why? because we import from coal from South Africa and the Bellary sector is totally based on imported coal only.