New mining cess may increase cost pressures for steel industry: ICRA

The power sector, which is heavily dependent on coal, may see a rise in the cost of supply by 0.6 per cent to 1.5 per cent, potentially leading to higher retail tariffs, ICRA added

Ratings agency ICRA has forecast a challenge for the domestic steel industry in the form of the new mining cess by some states, following the recent Supreme Court ruling empowering states to levy taxes on mineral rights and mineral-bearing land.

ICRA said that the development was poised to compress operating margins across the sector, impacting both primary and secondary steel producers.

“As per ICRA estimates, primary steel producers’ margins could shrink by approximately 60-180 basis points, while secondary producers, with already lower profitability, may face a more severe impact, with margin declines ranging from 80 to 250 basis points, based on various scenarios that cess rates could potentially vary between 5 per cent and 15 per cent,” the note said.

The power sector, which is heavily dependent on coal, may see a rise in the cost of supply by 0.6 per cent to 1.5 per cent, potentially leading to higher retail tariffs, ICRA said.

Further, primary aluminum producers are also expected to be impacted due to their high power consumption.

Girishkumar Kadam, senior vice-president and group head, corporate sector ratings, ICRA said, “The enforcement of the new mining cess by key mineral rich states can heighten cost pressures for the steel industry. While most states haven’t set the rates yet, any substantial cess implemented could adversely impact margins, especially for secondary steel producers, as the merchant miners are expected to pass on the increased costs. Consequently, the implementation strategies adopted by various state governments will be crucial in shaping the competitive landscape of the steel industry.”

The spotlight is on Odisha, which accounts for more than 40 per cent of the total value of minerals produced in the country.

Odisha had introduced the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED Act) which permits a 15 per cent cess on iron ore and coal.

If fully enforced, it could result in an 11 per cent increase in the landed costs of iron ore, directly impacting the cost competitiveness of domestic steel entities, ICRA noted.

In a related move, the government of Jharkhand also recently imposed an increase of Rs 100 per tonne on iron ore and coal. ICRA believes that this could set a precedent that other states may follow.

“This increase is expected to have a minimal impact on steel entities’ operating margins, reducing them by around 30-40 basis points. Even if other states adopt similar measures, the overall impact will likely remain modest,” the ratings agency said.

“If the cess is applied retrospectively, it could increase financial pressure on steel companies. However, the Supreme Court’s provision for staggered payments over 12 years starting from April 1, 2026, without any interest and penalties on past demands offers some financial relief,” Kadam said.

The ripple effects of the ruling are likely to be felt beyond the steel sector. The power sector, which is heavily dependent on coal, may see a rise in the cost of supply potentially leading to higher retail tariffs. 

ICRA expects primary aluminum producers to be also impacted due to their high power consumption, with costs potentially increasing by approximately Rs 1,200-1,300 per tonne ($15-$16 per tonne), assuming a 15 per cent cess, which represents 0.6 per cent of current aluminium prices.