Mumbai: With leases on over 30 iron ore mines expiring in March 2020, domestic steel makers may face disruption in production, credit ratings agency Crisil has said. These mines account for 50-55% of Odisha’s production and 10% of other states’ output.
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 current leases to merchant miners lapse iron ore output will fall by 30% unless the government gets its act together to re-auction them.
Crisil said if auctions are conducted in a phased manner from the third quarter of this fiscal, supply disruption shall be limited, and iron ore prices will rise 15-20% in FY21 based on the new auction premium.
However, if 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 further 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 squeezing 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 delay in auctions. It said 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.