Mumbai: Alarm bells are being raised once again for steel producers who do not have access to their own iron ore resources. In a research report, credit ratings agency Crisil has said that with leases on over 30 iron ore mining leases, which account for 50-55% of Odisha’s and 10% of other states’ production, expiring in March 2020, domestic steel makers will face a disruption in their production.
In FY19, India produced 207 million tonne of iron ore, 65-70% of which was by merchant miners and the rest by captive steelmakers. Odisha alone is estimated to have produced 114 million tonne, or more than half of India’s iron ore production. Of this, 70% was produced by merchant miners and the rest by captive steelmakers. When the current mining leases to merchant miners lapse, iron ore output will fall by 30% unless the government gets its act together to re-auction them.
Crisil has estimated that if the auctions are conducted in a phased manner from the third quarter of this fiscal, the supply disruption shall be limited, and that iron ore prices will rise 15-20% in FY21 based on the new auction premium. However, if the auctions are delayed, larger steel players shall bid higher premiums to ensure long term supply of ore and avoid future disruptions. This will translate into a greater rise in iron ore prices for them. The entire 50-60 million tonne of supply will halt until new clearances are received, leading to iron ore imports at higher prices. Local prices will rise by more than 30% then, further crunching the profitability margins for steel producers with new captive mines and for non-integrated steel players who will depend on merchant miners.
In May, credit ratings agency India Ratings had also highlighted the risk to the steel sector because of a delay in auctions. It said that companies such as JSW Steel, Rashtriya Ispat Nigam Ltd, and those that are either under stress or have been referred to the National Company Law Tribunal (NCLT) would be affected. The iron and steel sector has a total fund-based banking credit of ₹2.85 trillion and most players in the industry do not have assured iron ore access, putting their repayment obligations at risk if production is disrupted.
