2.5% import duty waiver on iron ore lumps a cost relief for steel mills

The move is likely to facilitate greater ore availability to steel mills post March 31, 2020 when licences of many merchant mines expire

The waiver of 2.5 per cent duty on imports of iron ore lumps, fines and pellets can bring much relief to the domestic steel makers after March 2020, when merchant mines across the country are headed for expiry.

A report by Icra Research says the sluggish pace of auctions of mineral blocks could cast uncertainties on iron ore supplies after the lease validity of the merchant mines ceases. The deficit in iron ore is pegged in the range of 52-55 million tonnes (mt) after supplies from the merchant mines freeze.

The supply stress, Icra feels, would be felt in 2020-21. Tightness in supplies is likely to lead to a sharp escalation in prices of iron ore.

Nearly 70 per cent of the country's steel plants are without captive iron ore resources and hence, dependent on supplies by the merchant miners. The working mines in Odisha and Jharkhand meet around 45 per cent of the raw material needs of steel mills concentrated in the eastern sector. Though these two states have accumulated a stockpile of 127 million tonnes, they are of baser grade and not lifted by steel units.

Data from the Union mines ministry's central coordination-cum-empowered committee (CCEC) shows 329 merchant mines are headed for expiry by March 31, 2020. Only 48 mines are operative and 101 are eligible for auctions.

Icra is batting for the government's continued thrust on steel-intensive end-user industries such as construction, housing, railways, roads, urban infrastructure, and power transmission. “Fast-tracking iron ore mine allocation through auctions and withdrawal of 2.5 per cent import duty on iron ore lumps, fines and pellets are likely to facilitate greater ore availability to steel mills post March 31, 2020 when licences of many merchant mines expire,” it suggested.

After back-to-back years of firm growth, the domestic steel sector has, at the start of this fiscal, seen a slump in demand. Growth in steel consumption too decelerated to 6.4 per cent in April 2019 from a growth of 7.5 per cent in FY19 and 7.9 per cent in FY18. Steel is buffeted by headwinds like tepid auto sales, weak consumer sentiment, sub-six-per cent growth in Q4 of FY19 and prevailing tightness in liquidity in the aftermath of the NBFC (non-banking financial companies) crisis. These factors could temper demand in FY20.

In the previous two fiscal years (FY18 and FY19), recovery in steel demand was goaded by public spends in infrastructure and construction sectors, which together account for 50 per cent of domestic demand. Supportive policies in steel-intensive sectors like construction, housing, railways, roads, urban infrastructure and power transmission are likely to help the domestic steel industry.