Iron ore royalty may go up while steel industry is down in the dumps

The United Progress Alliance government looks set to raise the royalty rates on iron ore by 50 per cent, a move that may hurt steel companies.

A panel appointed by the Ministry of Mines has proposed to increase royalty that miners pay on iron ore - lumps, fines and concentrates of all grades - from 10 per cent of the sale price to 15 per cent.

The panel made the suggestion in its draft report circulated to stakeholders. Industry sources say the Union Cabinet is likely to approve the proposal.

Iron ore miners have been paying a royalty of 10 per cent on ad valorem basis with effect from August 13, 2009.

Chhattisgarh, Karnataka and Jharkhand are the major states where iron ore is mined. The miners pay royalty to the respective state governments, while the rates are decided by the Centre.

The proposal to increase the royalty on iron ore comes a year after the Centre raised the royalty payable on coal to 14 per cent of the sale price in May 2012.

Iron ore miners such as NMDC Ltd, Sesa Goa Ltd, MSPL Ltd, and steel makers with captive mines such as Tata Steel Ltd and Steel Authority of India Ltd (SAIL) will have to pay more once the central government accepts the recommendation and notifies the revised royalty rates.

Since steel companies, especially those without captive mines, need to buy iron ore from outside, miners are likely to pass on the cost increase.

The Federation of Indian Mineral Industries (FIMI) has, however, given a note of dissent to the proposal. "The hike in the royalty rate for iron ore... will have a very high impact on mining companies and also have a cascading effect. Apart from the royalty itself, there are various other duties and levies which are directly linked to the rate of royalty and will have an adverse impact."

According to reports, FIMI has demanded that the royalty rate be slashed to 7.5 per cent of the sale price.

The bigger question is whether the steel industry will be able to absorb the costs.

MSPL Executive Director Rahul N. Baldota says the royalty charged on iron ore in India is highest in the world. He says the proposed raise does not make sense as the industry has already moved to ad valorem system of royalty calculation, which means the royalty amount will move up or down in sync with iron ore prices. "Over and above the royalty, we are paying 12 per cent of forest development tax and 10 per cent special purpose vehicle charges for development of the local community. Any increase in royalty will further worsen the mining sector."

According to Alex K. Mathews, head of research at Geojit BNP Paribas Financial Services, demand for steel has been low because of a slump in Chinese consumption and muted growth in India's infrastructure sector.

"The steel industry has already absorbed all negative news, and the steel stocks are already underperforming. So, any negative news will not have any major impact on these stocks."

Tata Steel has dropped to around Rs 263 from a high of Rs 455 in July last year; SAIL has lost more than 50 per cent since January this year to Rs 50. JSW Steel has dropped from Rs 939 in January to Rs 645 now.

A June 26 note by Edelweiss Research says SAIL will take a six per cent hit on its earnings before interest, taxes, depreciation and amortization (EBITDA) due to its low margin. "We estimate a cost push of Rs 200-320 per tonne of steel for Indian players. With weak demand, we do not see scope for sustainably increasing steel prices and accordingly expect a squeeze in margin... At the EBITDA level, we estimate the impact between 1.5 per cent and six per cent across various companies."