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Steel makers without captive mines are likely to face up to 20% hike in costs

In FY2019, domestic production of ore is estimated at around 207 mt, 65-70% of which was by merchant miners and the rest by captive steelmakers.

, ET Bureau|
Jul 17, 2019, 05.08 PM IST
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BCCL
Steel Makers
In FY2019, domestic production of ore is estimated at around 207 mt, 65-70% of which was by merchant miners and the rest by captive steelmakers.
With a host of merchant mines nearing expiry of leases in March 2020, steel makers without captive mines who contribute up 75% of the domestic production, are likely to face up to 20% hike in costs. This would put pressure on profitability of these steelmakers leading to a 300-400 basis point fall in Ebitda (earnings before interest, tax, depreciation and amortisation) margins in fiscal 2021, according to a latest report by CRISIL.

In March 2020, leases for over 30 iron ore mines which account for nearly 62 million tonne (mt) of ore – comprising 50-55% of Odisha’s output and 10% of other state’s production of around 10 mt-- are expiring. This could lead to a 30% reduction in overall iron ore output. Significantly all these leases are held by merchant miners.

“With the expiry of iron ore mining leases nearing, there is quite some uncertainty about the completion and scheduling of auctions for G2 exploration licenses,” the report said. Three possible scenarios could emerge, it added. In the base case, assuming auction takes place in Q3 of FY2020, prices are predicted to go up by 15-20% in 2021 with limited supply disruption. If leases are extended by 2-3 years for existing mines there will be no supply disruption. “However, if there is a delay in auctions which is open to both captive and merchant miners, large steel players shall bid higher premiums to ensure long term supply leading to higher iron ore costs for them. The entire supply of 60 mt will come to a halt leading to iron ore imports at higher prices,” the CRISIL report added.

In FY2019, domestic production of ore is estimated at around 207 mt, 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.

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