Commodity companies face two major risks. One is the collapse of the product prices. Another is a surge in input costs. As it turns out, both the risks are on the mend for steel producers, even though sustainability is uncertain.
Prices are recovering from the lows seen in 2019 and, as a result of a recent amendment to the Mines and Minerals (Development and Regulation) Act, 1957, steel companies may as well look to retain the incremental gains.
Among other things, the amendments allow state governments to auction mines before the expiry of the leases. The winner of the mining lease inherits all the rights and clearances vested with the previous operator, for two years. The firm is required to seek fresh approvals during this time.
This vastly reduces the threat of raw material shortages for steel producers, especially for companies that lack captive iron ore mines, such as JSW Steel Ltd, and Jindal Steel and Power Ltd.
Mining leases constituting 22-27% of India’s iron ore output are set to expire by 31 March this year, said analysts at Jefferies India Pvt. Ltd. Fearing supply disruptions, steel companies began stocking up iron ore, leading to a rise in the price of the raw material. The latest changes to the mines Act will allay concerns to some extent.
Still, competition at auctions can also drive up raw material procurement costs, warned Crisil Research.
“We still expect the iron ore supply in the market to reduce in FY2021E and market balance to tighten," analysts at Kotak Institutional Research said in a note.