Delhi to minimise impact from iron ore lease expiry

Delhi will seek to minimise disruptions to iron ore supply for the steel industry, especially smaller mills, once mining leases of several mines expire on 31 March 2020.

The government is working to develop a roadmap for auctioning the expiring leases as well as seeking ways to bundle regulatory clearances with the award of leases to allow mining to start quickly, said steel minister Dharmendra Pradhan.

Mining leases of 59 iron ore mines with a total capacity of 85mn t/yr in the major producing states of Odisha and Karnataka are due to expire in March 2020.

The combined production of these mines is estimated at around 60mn-70mn t/yr.

Auctions have not yet started for the expiring leases. It typically takes six to seven months to award bids following such auctions, while regulatory clearances may take more than a year after a lease is awarded.

A shortfall in domestic supply is expected to increase iron ore imports sharply.

India's iron ore prices are much lower than global levels, making the Indian steel sector one of the most profitable in Asia. The August average of India's 64pc Fe basis iron ore fines price was around $55/dry metric tonne (dmt), including royalty and taxes, while the average price of the Argus ICX 62pc seaborne index was $86.25/dmt cfr China.

Mills such as Tata Steel and Sail are insulated from supply problems as they own large iron ore mines, while other large integrated producers such as JSW Steel, Essar and Vizag Steel may have the financial muscle to withstand higher ore prices and an erosion in margins for some time.

But smaller mills that use either the blast furnace route to produce steel or buy pig iron, scrap and iron ore pellet for use in their induction or electric arc furnaces may find it difficult to stay in business if costs rise too much.

India's iron ore output is expected to increase by over 7pc to 225mn t in the April 2019-March 2020 fiscal year as mines are producing more iron ore to stock up ahead of the leases' expiry next year, according to India-focused ratings agency Icra. There are expectations that higher stocks and increased production by state-run producer NMDC will bridge part of the supply gap.

Raw material security and a slowdown in demand are the main challenges facing the steel industry today, said Seshagiri Rao, joint managing director of JSW Steel.

India's finished steel consumption slowed to 1.7pc on the year in August, with the economy seemingly slipping into a recession. There are little expectations of any short-term revival in demand from the manufacturing, real estate and infrastructure sectors as banks remain cautious about lending to avoid bad debts, while domestic demand for several goods and services has cratered.