The lower payout under DMF and the imposition of the safeguard duty on hot-rolled coils announced last week could benefit steel producers who are reeling under a stressed credit profile given muted demand growth, low capacity utilization and significant imports.
The notification specifies a DMF contribution at 10% of royalty rate for miners granted mining lease after the cut-off date of 12 January 2015 and a DMF contribution at 30% of royalty rate for miners which had been granted the mining lease before the cut-off date. The Mines and Minerals (Development and Regulation) (Amendment) Ordinance, 2015 promulgated on 12 January 2015 which was then enacted on 27 March 2015 had specified the maximum contribution to the DMF at 100% for existing miners and 33% for new miners.
Ind-Ra in its report DMF Contribution to Stress Steel Producers' EBITDA highlighted the DMF impact at INR153/t-INR465/t assuming 33%-100% royalty payout. The payout will now decline to INR100/t on account of the lower DMF contribution and due to the decline in the notified price of iron ore lumps and fines by Indian Bureau of Mines by nearly 8%-18% over March 2015-June 2015. Additionally, the DMF contribution has to be made from the date the Act came into effect i.e. 12 January 2015 and not retrospectively.
Ind-Ra believes the lower contribution to DMF and the recent imposition of the safeguard duty on hot rolled coils import to be directionally positive for the steel producers. Ind-Ra in its commentary Safeguard Duty to the Rescue of the Steel Sector highlighted that post the imposition of the safeguard duty the landed price of hot-rolled coils imported from China will be costlier compared to domestic steel prices by INR2000/t.
Post imposition of the safeguard duty and the lower contribution to DMF, steel producers would have a net positive contribution of INR1,825/t assuming specific consumption of iron ore at 1.75x per tonne of saleable steel. This also assumes that domestic steel producers will be able to sustain higher selling prices. However, the possibility of such a price advantage would be contingent upon the reaction of the Chinese exporters, because if they were to lower their price further, as had been the case in the past, the Indian steel producers may not derive the expected benefits.
Ind-Ra estimates that the total contribution from the iron ore miners to be nearly INR15.3bn to the DMF. The funds generated by DMFs would be used for the welfare of areas and people affected by mining related operations under the Pradhan Mantri Khanij Kshetra Kalyan Yojana (PMKKKY). Under the scheme, high priority areas like drinking water supply, health care, sanitation, education, skill development, women and child care, welfare of aged and disabled people, skill development and environment conservation will get at least 60% share of the funds. For creating a supportive and conducive living environment, balance funds will be spent on making roads, bridges, railways, waterways projects, irrigation and alternative energy sources.
Ind-Ra has outstanding rating on Tata Steel's ('IND AA'/Negative) and SAIL (IND AAA/Negative) and JSW Steel (IND AA/Stable).
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