Non-integrated steelmakers set to pay 15-20% more for iron ore from FY21

Non-integrated steel players are headed for higher cost of operations from FY21 post the lease expiry of merchant mines as their iron ore sourcing cost is expected to escalate by 15-20 per cent.

Bereft of captive iron ore resources, the non-integrated producers bank on merchant supplies to sustain their operations. Such steel companies have a dominant role in the country's crude steel output since they contribute three-fourths to the annual production.

"After the lease validity of merchant mines ceases on March 2020, there will be a spell of shortfall in iron ore. Assuming that the premiums at auctions of iron ore blocks in Odisha and Karnataka will be rational, the ore prices would still be pricier. For non-integrated steel makers, the landed cost of ore could rise by 15-20 per cent”, said a metals analyst.

Till the end of FY20, no hikes in iron ore prices are expected as the domestic market will continue to remain oversupplied. Merchant iron ore producers whose leases are scheduled to lapse by March 31, 2020 are looking to maximize output. Odisha has 16 operative merchant mines whose leases expire by then. The mines add up to 80 million tonnes in approved capacity. In FY19, Odisha produced 114 million tonnes (mt) of iron ore, accounting for more than half of the country's estimated production of 207 mt.

Also, with international iron ore prices slumping to six-month low of $87 per tonne on Wednesday, domestic miners are faced with increasing pressure to cut prices. State run NMDC Ltd, the biggest iron ore producer,  has cut prices of iron ore lumps by 9.6 per cent to Rs 2900 a tonne and that of fines by seven per cent to Rs 2660 a tonne. The revised prices are effective August 20. 

Post March 31 2020, the iron ore prices are expected to climb depending on outcomes at auctions of iron ore blocks.

While integrated steel producers will be insulated from the price hike due to captive supplies, the price which their    non-integrated producers shell out will be 2.6 times, a previous study by CRISIL Research showed. The existing integrated steel companies such as Tata Steel and central public sector enterprise SAIL will be immune to price flare-ups and hence, would not face cost pressures. By contrast, the new integrated steel players like JSW Steel who have won new iron ore leases at high bid premiums over the last two years will grapple with 5-8 per cent hike in iron ore costs over what they previous purchased from the merchant producers. 

When iron ore auctions first took off in 2015-16 after the framing of Mineral Auction Rules 2015 pursuant to the amended Mines and Minerals- Development & Regulation (MMDR) Act, 2015, the bidders placed high stakes on the blocks  offered at online auctions to ensure a long-term iron ore security for smooth running of their steel units. 

For non-integrated steel producers, iron ore costs have 11-15 per cent share in the cost of production. Elevated ore prices during FY21 will narrow their Ebitda (earnings before interest, taxes, depreciation and amortisation) by 300-400 basis points, CRISIL estimated.