There is more bad news for steelmakers facing demand crunch owing to a sluggish market as the government plans a 50% increase in royalty rates for iron ore, the primary raw material used for making steel. The increase is set to inflate production cost by a significant R500-700 per tonne, pushing either steel companies or mining entities to absorb the price rise, given the slump in demand.
Iron ore accounts for up to 50% of the cost of steel making for companies without captive mines. The two largest producers, Tata Steel and SAIL, have own mines and are largely insulated from the price hike. HR coil, the item often quoted for benchmark steel price, is currently sold at Rs 34,500 per tonne.
?The current economic environment is not conducive for the steel sector. If the government increases the royalty rates (of ore), we don?t know whether we will be able to pass the additional burden to consumers. Our costs will go up significantly,? Bhushan Steel chief financial officer Nitin Johari said. Mining companies such as National Mineral Development Corporation, Sesa Goa, Essar Mining and Hindalco are also up in arms against the government?s proposal to increase iron ore royalty rates and other minerals as they feel it would come at a time when prices of steel and other value-added products are under pressure. Already, the market sentiment is that benchmark prices may fall further by up to R1,000 per tonne over the next few weeks due to poor demand. ?Current prices of steel remain under pressure due to overcapacity scenario globally,? said SAIL and NMDC chief CS Verma.
An Essar Steel official said the price of hot rolled coil has witnessed a fall of R1,000-1,200 over last one year and is expected to fall further
in the coming months, putting
pressure on the margins of the companies. The official added that margins will get eroded further if the government went ahead with its plan of increasing the royalty on iron ore. The current benchmark hot rolled coil price of steel is R34,500 per metric tonne.
A task force, constituted in 2011 under the chairmanship of an additional secretary in the mines ministry, had recommended that iron ore royalty rates be raised to 15% from 10%. Iron ore miners have been paying a royalty of 10% on ad valorem basis since 2009. The government fixes the royalty for five years, that comes up for revision in 2014.
The companies say any increase in royalty rates would lead to not only a loss in revenue to state governments but also hurt the employment of thousands of workers. The move is also going to adversely impact those companies without captive mines and are dependent on purchasing iron ore and coal from abroad.
Over the last few years, there has been a decline in production and export of iron ore. Production has come down from 219 million tonnes (mt) in 2010 to 170 mt in 2012 and exports have fallen from 117 mt in 2010 to 62 mt in 2012. According to industry estimates, exports of iron ore in the current year will be less than 20 mt.