Steelmakers like Tata Steel and Steel Authority of India (SAIL) are heading for fresh trouble in the wake of Jharkhand state government ordering closure of 12 mines, including the mines controlled by these two steel giants.
The District Mining Office (DMO) of Chaibasa in Jharkhand has recently issued a closure notice to 12 of the 17 working iron ore mines in West Singhbhum, running under second and third subsequent deemed renewal. The shutdown is similar to Odisha and Goa iron ore mining ban that cancelled license of all leases operating under deemed second or subsequent renewal.
Jharkhand state has also issued notices to mines belonging to SAIL (Durgaiburu, Bhudaburu & Kiriburu), Tata Steel (Noamundi) and other merchant mines belonging to Singhbhum Minerals, Mishri Lal Jain, Rameshwar Jute Mill, OMML's Ghatkuri, PK Jain, Devka Bhai Bhelji and Vijay Kumar Ojha. Five iron ore mines that have been spared belong to Rungta Mines, Anandita Traders, Usha Martin, Anil Kumar Khirwal and Shah Brothers.
According to Edelweiss, the above-mentioned mines account for around 30% and 25% of total iron ore requirement of SAIL and Tata Steel (India), respectively. IDFC Securities on the other hand believes SAIL meets nearly 44% of its requirement from the three mines. SAIL's three mines had a combined production of around 11 MT in FY14.
Tata Steel gets around 5 million tonne of annual ore supply from Noamundi. The company has shut down this mine over the weekend and now have to rely on the inventory or may have to source some from Odisha or import consignment, which may come at a higher price.
Brokerage houses are of the view that the closure of mines would not have any significant financial impact on Tata Steel and SAIL, as the companies have 30-40 days of ore inventory at their plants. However, if the ban continues beyond mid-October, external purchase of iron ore could raise the production cost for both steelmakers.
IDFC said Tata Steel's average iron ore cost could go up to Rs 3,000/tonne as against current captive cost of Rs 1,100/tonne.
"Assuming all of Tata Steel/SAIL's iron ore mines in Jharkhand are closed for 6 months (i.e. until completion of the renewal review process) and they substitute captive iron ore from these mines with imported iron ore, our sensitivity analysis indicates a negative impact to their book value by 2%/6%," Goldman Sachs said in a report.
"We forecast incremental cost of importing iron ore of $228 million and $648 million in FY15E for Tata/SAIL (or 7%/56% of EBITDA), impacting PAT by 18%/97% respectively. However, if the Jharkhand state government allows mining to start for steel producers (as in the case at Odisha, where express orders were given to Tata Steel and SAIL to start mining within a month of the ban),we expect the impact to be negligible," the brokerage house added.
Edelweiss stressed that continued shut down of these mines will adversely impact profitability. "However, taking cue from the Supreme Court's Odisha judgement, we expect captive miners i.e., SAIL and Tata Steel, to resume operations soon, potentially in less than 3 months," the domestic brokerage said.
Softening international ore prices however could provide some relief to these steelmakers. Tata Steel earlier tried to experiment with imported ore shipment when it faced mining ban in Odisha.
International iron ore spot price dropped to fresh five-year low of $82.20 a tonne from around $96 a tonne a month ago. In its recent report titled "The end of the Iron Age," Goldman Sach said that the 2016 forecast for seaborne ore was cut to $79 a metric ton from $82 and the 2017 outlook was reduced to $78 from $85. The raw material tumbled into a bear market this year due to supply glut.
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