Steel firms fear NPAs on iron ore export move

After Karnataka miners' threat to move the Supreme Court (SC) this week to allow them to export iron ore, the state steel manufacturers have also gone aggressive in their opposition to it.

Ramana Kumar, secretary of Karnataka Iron and Steel Manufacturers' Association (Kisma), told DNA Money that if the state-owned National Mineral Development Corporation (NMDC) and the private miners were permitted to export, iron ore shortage will further increase and result in more non-performing assets (NPAs) and plant shutdowns in the steel industry.

"The shortage (of iron ore) for steel manufacturing in the country will increase. Everybody will have to shut down if they (miners) start exporting iron ore. As it is, there is a severe shortage in Karnataka, and if they start exporting then there will be even more serious problem," he said.

Kumar said there was an extreme shortage of iron ore in Karnataka following SC's directive in 2013 to regulate its mining to 30 million tonne per annum (mtpa) to curb illegal mining. This was later raised to 35 mtpa but Kumar said shortfall for the raw material of steel still remained.

M V S Seshagiri Rao, joint managing director and group CFO, JSW Steel, told DNA Money that miners have taken advantage of the supply gap and hiked prices. Later, they moved from uniform pricing across India to differential pricing, which has made production of steel using iron ore from Karnataka uncompetitive.

"Owing to sudden curtailment of iron ore availability, iron ore prices were hiked at the cost of the steel industry. Gradually, iron ore suppliers (including NMDC) have deviated from the well-settled prevailing pricing mechanism of pan India uniform pricing to differential pricing. User industry had no choice but to use the low-grade material at the cost of productivity and profitability by procuring it at substantially inflated prices," he said.

The CFO of the major steel producer said in order to survive and stay competitive, JSW Steel and others are currently sourcing part of their iron ore demand from states like Odisha and Chhattisgarh.

"Procuring superior and competitively priced iron ore from other states has resulted in increased productivity and significant savings for us. This justifies that sourcing of material from outside Karnataka is far better than using inferior material at such inflated prices," argued the JSW finance executive.

According to Kisma secretary, the net price difference between iron ore from Odisha, Chhattisgarh and Karnataka – the three major iron ore producing states – was around Rs 2,000 per metric tonne.

"Over the last one year, NMDC and private miners are jacking up the prices. Today, if you look at the prices in Orissa it is roughly around Rs 1,200 per metric tonne whereas in Karnataka it is Rs 3,000 or Rs 3,500 per metric tonne. The net price gap between Odisha, Chhattisgarh and Karnataka is Rs 2,000 per metric tonne," he informed.

State miners, on the other hand, have claimed that local steel makers were not buying from them at the e-auctions, which had led to a bulk of the commodity remaining unsold.

According to Rao, some state private miners had already started correcting prices helping them improve sales at e-auctions.

He complained that the government-run miner continued to hike prices. "Contrary to this (private miners' move), the NMDC (which recorded insignificant sales in April and May) further increased the prices in June".

Rao added, "while NMDC is hiking prices and is not able to sell at those prices, private miners have augmented their production as reflected in the higher environmental clearance (EC) utilisation in Karnataka at above 90% and NMDC's EC utilisation has dropped to 20% from 90%".

Lower sales volume of NMDC had also pulled down Karnataka's tax revenues.

"There should not be any reason for the NMDC to stop mining and cut down sales on the expectation of realising unfair prices (that was lowering their sales). The point to note is that private miners are not only able to sell at revised (corrected) prices but have also increased their production to offset to some extent the loss of production from NMDC," said Rao.

He said that NMDC would be able to offload their iron ore by correcting their prices and bringing them in line with Odisha miners.

"They will also restrain any further loss of taxes and revenues to state and nation. NMDC should correct iron ore prices in line with that of Odisha pricing so that it can sell their production at a fair price and steel industry in Karnataka can operate steel plants sustainably," he said.

The Kisma spokesperson said that the major steel players in Karnataka import around 4 mtpa of their total requirement from other states.

He said despite reaching out to prime minister, Karnataka chief minister and state secretaries, there has been action taken till now.

"We have approached everybody, right from PM, CM to the state secretaries. We have made several representations to them. Unfortunately, nothing has happened," he lamented.

NNMD officials were not available for comment. However, according to reports, current fiscal saw only 25% of its iron ore being sold through e-auctions. It alleged that its sales had dropped mainly because of non-participation of major steel producers.

According to official data, in May NMDC's had produced 1.44 million tonnes of iron ore in Karnataka but could sell only 0.52 million tonne. The same period had seen demand for iron ore in Chhattisgarh at 4.01 million tonne outstripping supply of 3.09 million tonne.

As per World Steel Association's projection in 2016, India's steel demand in the current year is expected to grow by 7.1% when the global demand growth is likely to be 0.9% whereas China's could fall by 2%.

...& ANALYSIS

• JSW Steel and others are currently sourcing part of their iron ore demand from states like Odisha and Chhattisgarh
   
• State miners, on the other hand, have claimed that local steel makers were not buying from them at the e-auctions