State-owned mining major NMDC Ltd is working out a method to enter into long-term supply contracts with buyers for its iron ore produced and sold through e-auctions in Karnataka.
The company, in its recent submission to the Supreme Court, has indicated that it would enter into the long-term supply contracts by providing basic price and fixing the prices through e-auction.
NMDC’s move to work out a long-term supply contract comes after it failed to attract enough buyers for its iron ore lumps at e-auctions in Karnataka. Since September, the company has been witnessing poor response for its high-grade iron ore lumps owing to very high prices.
On September 14, 2012, 98% of one million tonnes put on auction was left unsold when the company fixed its floor price at Rs 5,350 per tonne. Subsequently, the company increased the prices to Rs 5,400 per tonne for auction on October 5, 17 and 31. The result was the same and 96% of the lots put on auction were left unsold. Other auctioneers monitored by the Supreme Court appointed committee are selling the same grade of iron ore at an average of Rs 3,600 per tonne.
Even in today’s (December 11, 2012) auctions, only 200,000 tonnes out of one million tonne put on auction were sold. However, it has been able to sell iron ore fines, which are priced at Rs 2,610 per tonne.
“We have been able to sell all our iron ore fines at the e-auctions. But, in the recent days, there has not been much interest for our iron ore lumps. Half of our lumps are unsold,” NMDC sources told Business Standard.
The buyers are required to pay the final bid price and 10% royalty, 12% forest development tax and 5.5% value added tax to the state government on the exact quantity of ore purchased at the auctions. After adding all these taxes, the landed cost of iron ore works out much higher and is beyond the reach for smaller steel companies.
On December 7, 2012, Arvind Datar, senior advocate appearing for the NMDC, submitted that the NMDC was facing problem on account of spot auction sale of the material and in case NMDC is allowed to enter into long-term contracts, there should be no difficulty in the smooth supply of iron ore to the iron ore manufacturers.
NMDC sources confirmed that the company was in the process of working out a method of entering into long-term supply contracts even though the ore is sold through e-auctions.
In fact, the Central Empowered Committee (CEC) of the apex court had given to NMDC the modalities, following which it can enter into long-term contracts for supply of iron to steel manufacturers on the basis of e-auction.
However, the CEC has not received any response from the NMDC in this regard.
Datar submitted that he would look into the suggestion made by the CEC and give his response on the next date evolving a method allowing the NMDC to enter into long term contracts by providing basic price and fixing the prices through e-auction.
The forest bench of the Supreme Court, which is hearing the case, has adjourned the hearing to January 8, 2013.
In August 2011, the Supreme Court had allowed NMDC to produce up to one million tonnes per month and sell it through e-auctions. However, due to several constraints, the company has been able to produce up to 800,000 tonnes per month.
