Vedanta's realisations from iron ore fall 20.6% over fragile demand

Metals & mining conglomerate Vedanta Ltd recorded a fall of 20.6 per cent in realisations from its iron ore operations in FY18, weighed down by fragile demand for its ore in export markets.

Vedanta's average net sales realisations from iron ore vertical slid to $26.1 per tonne in FY18 from $32.9 in 2016-17.

In last fiscal, Vedanta's Goa iron ore sales plummeted to 5.4 million tonnes (mt) from 7.4 mt in the preceding year, shrinking 37 per cent. Production, too, went downhill in the coastal state, going down from 8.8 mt to 4.9 mt, a decrease of 44.3 per cent. Other than Goa, Vedanta has iron ore mining presence in Karnataka where its production in FY18 stood at 2.2 mt, marginally bettering 2.1 mt in 2016-17. The company’s iron ore sales from Karnataka were however, down 18 per cent to 2.2 mt in last fiscal.

Also, Vedanta logged a sharp fall of 70 per cent in its Ebitda (earnings before interest, taxes, depreciation and amortization) from its iron ore business in FY18. A pronounced fall in iron ore production and sales in Goa where it was the largest ore miner, led to the slide in earnings.

The combined Ebitda from iron ore mining and pig iron operations dramatically fell to $57 million at the end of FY18 from $194 million in 2016-17.

Though the impact of the Supreme Court ordered mining ban in Goa was noticed only after March 15 this year, Vedanta could feel the tremors before the ban. Changing headwinds in the international iron ore trade swayed the demand away from low grade ore produced in Goa. In a sweeping order, the apex court threw Goa’s mining industry into turmoil, ordering closure of 88 iron ore leases, terming their second renewal ‘illegal’.

But, Goa’s iron ore miners, including Vedanta were in the doldrums even before the top court’s pronouncements.

“Even with the export duty waiver, Goa’s exporters could hardly find markets for their iron ore. As China’s steel mills turned pickier for quality iron ore on pollution concerns, the demand for low grade fines evaporated. Vedanta and other low grade producers suffered due to the changing dynamics”, said an analyst.

Goa has a reputation of producing low grade iron ore with Fe content of less than 58 per cent. All of Goa’s mined iron ore barring small quantities of lumps, were exported, primarily to the markets of China and Japan. But of late, export market demand for iron ore of Goa origin had dried out. China’s steel mills have shown proclivity to buy higher grade material as Beijing clamped down on polluting industries to balance industrial growth with environment sustainability. During boom, valuation of iron ore shipped from Goa was projected at nearly Rs 40 billion every year.

Last fiscal was a telling reflection of the slide in production of iron ore production in Goa. The state which barely produces any ore during the monsoon season, churned out only eight million tonnes in the whole of FY18. Before the Supreme Court ban, Goa had a permissible capacity to extract 20 mt annually of iron ore. Vedanta alone had approval to mine 5.5 mt.

In a previous statement, Vedanta said, it was looking at an impairment of Rs 15-18 billion net of taxes due to the stop in Goa mining operations. In the March quarter of FY18, Vedanta produced 1.5 million tonnes of iron ore and managed to sell 2.4 million tonnes. Its production volumes were lower year-on-year mainly due to tepid demand and mines closure in Goa pursuant to the Supreme Court order.