JSW Steel, owned by billionaire Sajjan Jindal, said Monday that it has slashed its factory output by 70% at its Vijayanagar Steel Plant to 3 million tonnes (mt) from 10 mt, as its iron ore supply was further disrupted after the Supreme Court ordered India?s largest iron ore trader NMDC to e-auction its iron ore from mines in Karnataka. JSW Steel believes this would lead to an artificial scarcity which would take prices to unnatural levels.

The steel maker?s request for a further hearing was turned down by the apex court on Monday. JSW Steel shares fell 2.26% to close at R618.45 on the BSE.

The company will go with the production cut ?until normalcy is restored?, Seshagiri Rao, joint managing director at JSW Steel, told FE from New Delhi in a telephonic interview.

?This is an issue of national interest, and not just the company.? At stake is the production of 16 mt of steel, R10,000 crore in income to the exchequer and employment to 80,000 people, he added. According to Rao, the online auction creates discrimination, since this is applicable only to 6 mt of the total 30 mt supplied by NMDC, and has hiked up iron ore prices by as much as 13.5%.

?The abrupt disruption of supplies to JSW Steel, a long term customer, by NMDC (has) cut the lifeline to run the furnaces in safe condition.? the company said in a statement.

Trouble started on July 29 this year, when the SC banned all mining operations in over 10,000 hectares in Karnataka?s Bellary, citing extensive damage to the environment as miners over-exploited mineral resources.

Large quantity of iron ore was fed to JSW Steel plant from the Bellary mines. Later, in an order on August 5, SC permitted NMDC to mine 1 mt of iron ore a month from its two mines.

JSW Steel said on August 8 it will operate its plants at around 80% capacity, unless it got further relief from the SC.

Analysts cautioned that JSW Steel will end up paying almost double the price of iron ore after the mining ban at Bellary.

?Iron ore costs for the company will go up to R5,000 a tonne from R2,800 a tonne it pays now as the company begins to purchase from MMDC,? said Ravindra Deshpande of Mumbai-based brokerage Elara Capital. ?This will affect them badly.?

According to Deshpande, JSW Steel?s production will be down for a quarter owing to the ban on mining in Bellary. ?We do not know what will be the quantum of loss.? JSW required 18 mt of iron ore a year to operate its two plants, but with the mining ban in Bellary, only 19 to 20 mt was available to the entire steel makers including 12 million tonnes from NMDC.

NMDC determines the price of iron ore for long term customers in India following the finalisation of long term prices with Japanese steel mills. The price is revised from time to time based on fluctuations in iron ore price in international market.

?The low grade iron ore is auctioned by NMDC in a transparent manner through MSTC, the same agency as recommended for e-auction of iron ore in the Karnataka region approved by the SC. Hence, NMDC sets the selling price of iron ore on pan India basis and is applicable across all regions and customers,? JSW said.

The SC had, on September 2, ordered a release of 1.5 mt per month out of stock piles through e-Auction. ?This measure has not given any relief as 31% of the total auctioned material was not bought by any of the participants in the e-auction due to improper pricing for low grade ore,? Rao said. Further, out of the balance 69% of the auctioned material, only 10% has been dispatched to the industry till date due to several procedural delays.

Therefore, certain grades of iron ore in the auction was bought at a higher price due to abnormal market conditions, he added. A spokesperson from Tata Steel said it is not affected since its iron ore mines are in Jharkhand.

Steel industry has been going through a rough patch in the country. The net production of finished steel grew 9.9% during the April-August, 2011 period to 29.06 mt from 26.45 mt in the same period a year ago.

The increase in consumption was merely 1.3% from 27.69 mt during April-August 2010 to 28.05 mt this year. Exports, however, registered a growth 56.7% from 1.16 mt during April-August 2010 to 1.82 mt during the same months this year.

The industry biggies said they are trying to maintain consumption by increasing their sales in different markets such as oil and gas, construction and power. ?Consumption was down in the last three month due to seasonal factors,? Vikram Amin, director (sales and marketing) Essar Steel, told FE.

?However, it will pick up from October onwards.? There is no inventory issue as we have maintained our volumes by selling it to various other sectors which would buy steel for their growth,? he added.

The falling rupee has brought a little hope for domestic steelmakers as they look at enhancing their exports. The average export prices for benchmark primary steel or hot rolled coil steel is now R38,000 a tonne, R3,000 cheaper than domestic prices. This, according to Jindal Power and Steel (JSPL), will push up the domestic demand.

?There are two benefits. First, we can sell more in the domestic market. Second, we can export more to have better margins,? says VR Sharma, chief executive and deputy managing director at JSPL The company makes .6 mt a year and 10% is exported. The export target has been increased to 15-18% this year, says Verma. Essar is looking at more exports to various countries in West Asia, southeast Asia.

Steel prices of various grades of steel have been rising. In Delhi, the price for pig iron, used to make primary metal, rose from R31,000 a tonne in June to R34,500 in August. The Steel Authority of India (SAIL) chairman CS Verma last week said steel prices are going to firm up in near future.