JSW Steel has decided not to bid aggressively for Odisha iron ore blocks in the next auction, owing to weak steel demand.

JSW Steel bid aggressively for three category-B iron ore blocks in Karnataka last month, and is unlikely to pay a premium for the Odisha blocks, said a senior JSW Steel official.

The bidding will be in two phases — the third week of August and September. Eight mines with reserves of around 573 million tonnes (mt) are expected to come up for auctions in August. A JSW spokesperson was not immediately available for comment.

"Odisha has a huge supply potential of iron ore but there is a lack of matching demand for such a huge quantity. Therefore, there is a potential risk to pay a huge premium for Odisha iron ore blocks," said the official.

Quarter-on-quarter steel demand across sectors — automotive, capital goods and consumer goods — was weak, though infrastructure and construction improved marginally.

Total finished steel stock at the end of April 2019 was at 9.93 mt compared to 7.49 mt in the previous year. At the end of May 2019, it was at 10.1 mt vis-a-vis 7.4 mt in 2018.

The weak demand pushed the prices of hot-rolled coils down by around Rs 2,500 a tonne since May and TMT bars by Rs 5,000 a tonne during the same time.

For JSW, bidding aggressively for the Odisha blocks would mean additional investment in a weak market, especially after having paid a premium for the Karnataka mines. JSW paid almost a 100 per cent premium for the Karnataka iron ore blocks.

Logistically also, Karnataka makes more sense for the company as it requires around 25 mt of iron ore for its flagship 12-mt Vijayanagar steel plant, the senior JSW official pointed out.

Moreover, the capital cost for the development of iron ore mines in Odisha will be much higher compared to other states due to the imposition of the recommendations by the National Environmental Engineering Research Institute, which prescribes to set up of slurry pipeline or railway siding or conveyor in case of mines producing more than 5 mt. Almost all mines in Odisha have a production capacity of more than five million tonnes.

Currently, JSW Steel has 18 mt installed capacity, of which Vijaynagar accounts for 12 mt. The target, however, is to reach an installed capacity of 45 mt over the next decade.

According to JSW, availability of iron ore wouldn't be an issue and hence, a mine at a premium at this point didn't make sense. "At present, the mining companies do not have an obligation to produce and can reduce the production as per market demand. But once the mines are auctioned, new owners need to produce minimum 80 per cent of rated mine capacity even if there is no matching logistics infrastructure or market demand," the company official said.

Odisha produced around 120 mt of iron ore in financial year 2018-19, which is more than 50 per cent of India's total production.