India Ratings and Research (Ind-Ra) said on Tuesday that steel production in the country will be significantly affected if the auction of mines completing 50 years of operations by March 2020 is materially delayed.
Consequently, the credit profile of merchant miners and thus non-integrated steel players could come under stress. The share of outstanding funds credited to the iron and steel sector to the total fund-based banking credit is about 5 per cent or Rs 2.85 lakh crore.
Besides, said Ind-Ra, most industry participants are not backward integrated.
The license of about 288 merchant mines will expire by March 2020, out of which 59 mines are under operations. Majority of these 59 mines are iron ore mines in Odisha and Karnataka with about 85 million tonnes of approved annual capacity.
Ind-Ra estimates that around 60 million tonnes of the actual production of iron ore from these mines could be disrupted. Considering that the auction process on an average takes three to six months to complete, a delay in initiating them until the latter half of 2019 due to the Lok Sabha elections in the country could affect the timely auction of mining lease.
There is limited historical data on the auctions of mines. Of the last major auctions of about 88 iron ore deposits, only a handful have started to operate. Auction to operation process gets elongated typically due to delays in obtaining environmental, wildlife and forest clearances.
The G2 resource prospection is a pre-requisite for auction which some of these mines may not have at the moment. JSW Steel has been among of the few players which have been able to start production from mines acquired under the auction.
Ind-Ra, part of the Fitch Group, said it expects steel players such as JSW Steel, Rashtriya Ispat Nigam and other steel companies, which are either under stress or referred to the National Company Law Tribunal, to increase their production in 2020.
Absence of domestic iron ore supply thereby will necessitate an increase in the import of iron ore mix, potentially leading to an increase in the cost of production. However, low-grade optionality is available for players such as JSW Steel which has a beneficiation facility.
Furthermore, smaller companies which are away from ports and operate in the landlocked region could face disruption in operations as they are primarily dependent on the domestic merchant miners for iron ore, said Ind-Ra in a market wire report.
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