Mumbai: The standoff between iron ore producers and steel plant owners in Karnataka over high prices of the raw material has intensified, with the miners set to move the Supreme Court seeking permission to export iron ore.
Steel producers, on their part, have alleged that the government-owned National Mineral Development Corp. (NMDC), among others, has been fleecing them and should lower domestic prices instead of exporting the ore.
M.V.S. Seshagiri Rao, joint managing director and group CFO, JSW Steel, told Mint on the phone that ever since the differential pricing for iron ore between states was introduced in 2016, NMDC has charged a premium in Karnataka.
“As long as it was ₹ 75-100 per tonne over and above the prices in Odisha and Chhattisgarh, we did not make a noise. Now, the base price itself is higher by ₹ 750 a tonne, compared to those states," he said. “Besides, Karnataka has an e-auction system for selling iron ore, which takes the final price even higher."
R.K. Goyal, managing director, Kalyani Steel, and vice-president of Karnataka Iron and Steel Manufacturers’ Association, said there was a shortage of iron ore supply in the state. “We have to buy everything on e-auction, but the prices there are very high," he said. “The landed cost in e-auctions is ₹ 4,500 a tonne. If I transport ore from Odisha, that’s an additional ₹ 2,500 a tonne, even though iron ore is available cheaper there."
“We had made a representation to NMDC a few months ago to reduce prices in Karnataka, but there has been no response from them," he said.
In response to Mint’s emailed queries, NMDC said: “During the current fiscal year, only 25% of ore got sold through e-auctions... The sale of iron ore in Karnataka was reduced mainly due to non-participation of major players in the e-auction. The prevailing prices of NMDC’s iron ore in Karnataka on landed cost parity basis is at a discount, compared to imports and other domestic alternates. Despite that, sourcing of iron ore from alternate sources by some major buyers is not justified."
“NMDC sees no reason for steel players to reduce offtake. However, there is a possibility that this is being done to pressurise NMDC and other major miners in Karnataka to reduce iron ore prices in Karnataka," it added. In a public disclosure, NMDC said that as of May, it had produced 1.44 million tonnes (mt) of iron ore in Karnataka, but could sell only 0.52 mt. During the same period, it produced 3.09 mt in Chhattisgarh and sold 4.01 mt.
“There is intense competition in the steel industry; so I can’t increase the price (of my steel) even if I am paying more for the raw material," said JSW Steel’s Rao.
On 11 June, Business Standard reported that the mining industry’s apex body, the Federation of Indian Mineral Industries, has decided to move the Supreme Court to allow Karnataka iron ore miners to export part of its production and clear idle stock.
JSW Steel runs its flagship 12 mtpa steel plant in Vijayanagar, in the iron ore-rich Bellary district of Karnataka. The company has plans to add another 4mtpa of capacity here in the next 24-30 months.
“Karnataka produces 24-25 mt of ore a year; we need about 21 mt," Rao said. “So we buy about 15-16 mt locally while the rest we source from other states.
“There is intense competition in the steel industry; so I can’t increase the price (of my steel) even if I am paying more for the raw material. Let’s assume I pay ₹ 700 a tonne extra for iron ore. Every tonne of steel needs 1.8 tonnes of iron ore; that is a ₹ 12,600 per tonne increase in cost that I have to absorb because I’m buying iron ore here. But steel producers in Odisha have a cost advantage over me."
Rao continued: “It doesn’t make sense for a company that has invested ₹ 50,000 crore in a steel plant because the iron ore is available next door to go elsewhere looking for iron ore now. Earlier, when (producers) were charging higher for the ore, we continued to buy even when we were bleeding in 2015-16. They are doing nothing but fleecing the companies."
An industry analyst, who did not want to be caught in the crossfire and wanted to remain anonymous, observed that this is an extension of a perennial argument between state-owned miners and private sector producers. “We see the same playing out between Coal India and private sector power producers.
“Iron ore prices in India are trading at a 5-10% discount to global prices right now," he said. “With no offtake in Karnataka and a weakening rupee, NMDC appears to want to take advantage of this situation by exporting a part of production," he added.
Over the long term, the Odisha government has plans to increase steel capacity to 100 mtpa by 2030 while in the short term, Tata Steel is likely to turn around Bhushan Steel’s stressed assets and run them at full capacity, increasing the local demand for iron ore in the state. “Steel producers in Karnataka are threatened by this," he added, “and want to ensure they have certainty of iron ore supply at a reasonable price within the state."