Cheaper imports to deliver future shocks to merchant miners

Domestic iron ore producers are feeling the pinch of a rising preference for captive mining among steelmakers and competition from cheap imports

India came into the reckoning for steelmaking by some of the world’s major groups more than a decade ago. Nothing came of that, though. As much as the certainty that steel demand in India would grow at a fair clip for years to come, the country’s ownership of 31.32 billion tonnes (bt) of iron ore, much of it of good quality, drew the Korean steelmaking major Posco to sign a memorandum of understanding (MoU) with the Odisha government in June 2005 for building a 12 million tonne (mt) steel mill in Paradip. The next year ArcelorMittal announced its plan to create a plant of identical capacity as Posco in Keonjhar district of Odisha.

Whatever might have been cited by the two steel groups and also the state government for scrapping the projects, the real reason was the uncertainty surrounding the allocation of the promised mining leases for a 30-year period to extract up to 600 mt of iron ore by each party. Posco and ArcelorMittal were reconciled to the condition that iron ore from the captive mines was neither to be exported nor swapped with foreign origin ore. In any case, that would have been in violation of the principle of captive mining. Besides iron ore, the local availability in abundance of non-coking coal used in making steel through the Corex process and of sponge iron make India the ideal production centre.

Discretionary allotment of deposits by the state came to an end in March 2015 with the amendment of Mines & Minerals (Development & Regulation) ACT. The states will still have the right to grant mineral concessions. But ahead of granting concessions, auctions are to be held to choose winners of deposits. The new regime has ushered in transparency and eliminated the discretion factor in allocation of all mineral deposits

To the relief of civic society, the amendment has eliminated a major source of corruption in allotment of deposits borne out by the court cancelling a good number of operational and under development mines. At the same time, however, the Act allows the government to allot deposits to public sector undertakings (PSUs) through the dispensation route. This left the likes of Posco and ArcelorMittal, which ahead of MMDR Act amendment were promised captive deposits, in limbo. Not only the foreign groups, Indian steelmakers, both in the public and private sectors seek raw materials security by owning mines.

For example, last year Vizag Steel signed an MOU with Andhra Pradesh Mineral Development Corporation for “exploration and exploitation” of Kukunoor iron ore deposits in West Godavari district. The PSU steelmaker feels the urgency to develop its own iron ore mines following its capacity expansion to 6.3 mt that will require ore use in excess of 10 mt. Vizag Steel gets its supply of ore from NMDC mines in Chhattisgarh.

Steel Authority of India Limited (SAIL), on the other hand, gets all the ore for its five integrated mills from its own mines. Similarly, the 10 mt Jamshedpur plant gets total supply of ore from Tata Steel mines. However, the company has also been buying some ore from Odisha Mining Corporation’s (OMC) Daitari mines for its Kalinganagar 3m tonne unit. Daitari being close to Kalinganagar, Tata Steel finds logistical advantage in using ore from mines there. Both Tata Steel and SAIL have historically been self-reliant in ore.  

But when the 18m tonne JSW steel acquired five iron ore mines in Karnataka paying high premiums at auctions held in October 2016, merchant miners, including the biggest of them, NMDC, got concerned about the future of their domestic business. JSW has concretised plans to take steelmaking capacity to 40-45 mt, including a 12 mt greenfield unit in Odisha by 2030-31 when the country aspires to make 255 mt of steel on a capacity of 300 mt. Merchant miners are reconciled to the possibility of JSW, backed by its financial prowess, bidding strongly for mines that will be auctioned by the states in future.

Not only JSW, merchant miners also have to contend with Vedanta, which has an iron ore mining licence in Jharkhand. But the state’s policy puts a condition that the ore to be raised by Vedanta should be used for local value addition. In a recent presentation, it has talked about a 10 mt iron ore project in Jharkhand. Vedanta building a 1 mt pig iron plant and ductile iron pipe in Jharkhand will take care of a portion of iron ore to be mined there. So it will be required to do a lot more to process ore locally. Vedanta has won the bid to acquire the bankrupt 2.5 mt Electrosteel Steels in Jharkhand with iron ore linkages. So merchant miners don’t stand a chance to get business from Vedanta, which also owns iron ore mines in Karnataka and Goa.

The fear is not unfounded that growing volumes of captive mining by leading steel producers will limit domestic sales of merchant miners. Then there is drying up of Indian exports from a high of 117 mt in 2009-10 to an estimated 40 mt in 2017-18. Court ordered ban on exports from Karnataka, halt in production in Goa since March 16 following the Supreme Court quashing the second renewal of mining leases by the state government and 30 per cent export duty on ore with over 58 per cent iron content have made India a marginal player in the global ore trade of over 1.5 bt.

According to N. Baijendra Kumar, chairman of the country’s largest mining group NMDC, merchant iron ore producers are also likely to face growing competition over the next few years from imports at low global prices. Most analysts say iron ore prices will come under pressure because of Chinese steel production growth slowing following state mandated closure of high cost and environment unfriendly capacity when global ore production, particularly in Brazil is rising.

Kumar says NMDC being early to see the future shock awaiting merchant miners is building a 3 mt steel mill at Nagarnar in Chattisgarh. As part of forward integration, it will also be producing pellets for use at that mill. Nagarnar plant after suffering cost and time overrun should be ready for commissioning later this year. To be further future ready, NMDC in alliance with strategic partners will also build steel capacity in Karnataka and Jharkhand.