At a time when domestic steel demand is tepid, the potential additional outgo on captive iron ore, the key input that makes more than a third of the cost of production of the alloy, is threatening to further diminish domestic steelmakers’ already squeezed margins.
For public-sector SAIL, the extra impost in the form of a mandatory contribution to District Mineral Foundation (DMF) alone could be as high as R1,700 crore in FY16, nearly equal to the net profit it posted for the first nine months of the last fiscal. In a letter sent to the steel ministry, the PSU has highlighted this and demanded that DMF outgoes of captive iron ore producers, such as itself, which can’t sell the ore and pass on the extra burden to consumers, be capped at 33% of the royalty paid.
As per the Mines and Minerals (Development & Regulation) Amendment Act made by Parliament last month, all existing miners of iron ore, bauxite and limestone and manganese ore, will be required to pay up to 100% of the royalty on the minerals additionally to the DMF meant for the welfare of the project-affected people, while the DMF outgo of firms that would get fresh mining leases (through the auction route) will not exceed 33% of the royalty.
SAIL reported a net profit of R1,758 crore on a revenue of R34,000 crore in April-December last year. That was indeed dismal profitability, even lower than the industry average. If the Centre decides to put DMF contribution at 100% of the royalty, the maximum allowable under the Act, SAIL could end up earning virtually nothing this fiscal, unless the domestic steel market shows a dramatic improvement and its sales and profitability pick-up.
Royalty on iron ore was hiked to 15% from 10% in August last year. With the higher royalty, the new DMF impost, a 2% National Mineral Exploration Trust levy, the burden imposed by the government on the steelmakers are indeed huge.
“At a time when the steel market’s margins have fallen drastically in the last few months and the situation is likely to continue in the ensuing year, it is difficult for a captive miner like SAIL to bear this additional outgo,” SAIL chairman CS Verma wrote to steel secretary Rakesh Singh. Private firms like Sesa Sterlite and Tata Steel will also take a hit due to the DMF levy.