India’s iron ore industry, one of the largest in the world, may be dealt a heavy blow beginning 2020-21, with the licences of many top producing mines set to expire in March 2020.
Most of the iron ore produced in the country is through the merchant mining model, in which the mines are given on lease to private players who extract the ore and sell it to the user industries.
While the revenues of most iron ore miners could fall as a result of production being halted following licence expiry, many steel producers who don’t own mines might see their profitability impacted.
For fiscal 2019, iron ore output in the country was put at 207 million tonnes (mt), 65-70 per cent of which was produced by merchant miners, says Crisil Research.
Expiring leases
According to a report by Ministry of Mines, 334 mining leases will lapse by March 31, 2020. Of the 334 mines for which the leasing rights were given 20-30 years ago, only 49 are operative.
The sluggish pace of auctions of iron ore blocks could further curtail the supply of iron ore, going forward. ICRA Research says that the deficit is pegged between 52 and 55 million tonnes after supplies from the merchant mines are frozen.
The shutting down of operations in such mines is expected to impact players in eastern India. This is because Odisha, the largest producer among the ore-producing States of Chhattisgarh, Karnataka, Jharkhand and Goa, caters to most of the steel players, which have no captive iron ore mines in the eastern region.
Capitalising on export demand
Anticipating the future freeze in iron ore production, miners in India are producing more iron ore in the current fiscal. Some of this surplus is being exported as producers seek to cash in on the supply crunch in some global markets, especially regions where supply was hit, such as Brazil and Australia, where production was impacted by natural disasters.
As per reports, India’s exports of the commodity at major ports rose 15 per cent y-o-y during April-June after falling in the same period last fiscal. Exports were higher despite the closure of Donimalai mines of the state-owned NMDC this year, as also stoppage of output from mines in Goa, where leases were cancelled by the Supreme Court due to environmental reasons.
Currently, iron ore exporters are also benefiting from high prices in the export market because of supply-demand dynamics. China has been importing more lower-grade fines because of its low iron ore inventory and the ramping up of steel mills across that country.
Possibility of imports
This scenario could, however, be short-lived. The transfer of leases to new owners after the auctions could take considerable time, halting iron ore extraction for some time, and India is likely to resort to imports.
As per Crisil, iron ore prices may spurt 15-20 per cent in fiscal 2021 to over ₹3,600-3,700 per tonne, provided phased auctions start in the third quarter.
Iron ore prices could rise by 30 per cent if mine auctions are delayed. In the latter case, captive miners (steel companies) might bid for higher prices, which may not be competitive for merchant players.
Impact on steel industry
About 70 per cent of the country’s steel plants do not have captive iron ore resources and are, hence, dependent on supplies by merchant miners. Any uncertainties in supply or pricing of the ore would significantly impact the steel sector’s production and profitability.
JSW Steel procures from captive mines only 5 mt of of its total iron ore requirement of 55 mt. The rest comes from external sources, either domestic or global.
Other players such as Kalyani Steels and Tata Sponge Iron may also be impacted by supply deficits and higher costs of iron ore, if the mining lease auctions go haywire. Tata Steel may not be impacted as its entire ore requirement is sourced from its captive mines.
As per Crisil, operating profit margins for non-integrated steel players could narrow by 300-400 bps over the next two fiscals because of higher iron ore costs coupled with lower realisations for steel. For integrated steel players, the fall in operating profit margin could be restricted to 100 bps.