July 31--NEW DELHI -- India could face a shortage in domestic iron ore and the competitiveness of a host of steel companies is at risk, as the promised iron ore linkages by different state governments have not materialized, steel secretary Mohan Kumar has cautioned in a letter to steel and mines minister Narendra Singh Tomar.
Mint has seen a copy of the letter.
Urging the government to speed up clearances for captive iron ore mines allocated to steel producers, Kumar said that despite having sufficient iron ore resources in the country, companies such as JSW Steel Ltd are now having to import a sizeable chunk of their ore requirements, as pending mining leases means domestic production of the ore is declining.
So far India has been dependent on domestic sourcing of iron ore, but owing to delays in getting mining clearances, ore remains trapped under the ground, he said.
"Except SAIL (Steel Authority of India Ltd), Tata Steel Ltd and JSPL (Jindal Steel and Power Ltd), none of the steel companies currently producing steel in India has been given any captive source, although they had invested in the states concerned on the assurance that captive mines will be allotted to them. These companies have been waiting for many years for the allotment of iron ore mines," the steel secretary's letter dated 16 June notes.
Iron ore production in India fell significantly in the past few years, from 218 million tonnes (mt) in 2009-10 to only 144mt in 2013-14 .
Tata Steel in its 2013-14 annual report said that in the long-term, if India has to be competitive, it would need captive iron ore to make the steel investments financially viable and sustainable.
A Tata Steel official requesting anonymity said returns from steel produced with imported ore will not meet the cost of capital. Tata Steel had a net debt of Rs.70,526.27 crore on 31 March and a debt-to-equity ratio of 1.93.
The recent closure of mines in Odisha and delays in opening up of mines in Karnataka and Goa has resulted in acute shortage of iron ore in the country, said Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel.
"We have decided to import half a million tonne of high-grade ore every month to maintain the capacity utilisation at optimum level. The surging iron ore prices due to shortages in India is a matter of grave concern when international iron ore prices dropped by more than 30% in the last 12 months," he said.
Unless India sustains exploration activity, new iron ore resources will not be found, Kumar said in his letter. Going by the available known resources, the country's effective iron ore reserves of high and medium grades of haematite ore will be over by 2032-33.
However, H.C. Daga, president of the Federation of Indian Mineral Industries, an industry body that represents mining companies, said that the shortage of iron ore is a myth.
"The state governments must speed up mining clearances. Also, a portion of the steel produced in the country is through recycled scrap thus the requirement of iron ore is exaggerated," he said.
Daga added that around 120mt of iron ore fines is lying as inventory as exports markets have dried up owing to the high export duty of 30%. But these iron ore fines find low domestic demand as they are of a lower grade.
Steel companies in India are heavily in debt because of the capital-intensive nature of the business. While Tata Steel and JSW Steel are looking to reduce their interest burden by refinancing local loans overseas, JSPL is looking to pare down its new investments and sell non-core assets.
Giriraj Daga, senior research analyst, institutional equities at Nirmal Bang Equities, however, does not expect major strain on steel producers' balance sheets from iron ore imports, as prices of imported iron ore have fallen significantly because of the global slump in demand.
"Iron ore prices are expected to hover around the current levels of around $90 (Rs.5416.20) per tonne over the next three-four years. The spreads at these levels are good enough for viable operations," he said.
Iron ore fines with 64.5% Fe content imported into India cost about Rs.5,700 per tonne. In India, a similar grade is available for about Rs.200 less.
A report by brokerage Motilal Oswal Financial Services Ltd notes that falling coking coal prices, a stronger rupee and stable steel pricing should aid Tata Steel, SAIL and JSW Steel post stronger margins.
The domestic iron ore industry is fragmented with 336 operating mines reporting production to the Indian Bureau of Mines (IBM) in 2011-12, as per their latest report.
India is planning to almost triple steel manufacturing capacity to 300 million tonnes by 2025, but there has been a fall in the capacity utilization of Indian steel industry to 77% in 2013-14 from 88% in 2010-11.
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