At present, the highest risk factor for any steel producer happens to be the security of raw materials. As 16 out of 68 M&A activities in the world in 2010 pertains to acquisition of mines, the fresh leasing of mines, its renewal and ownership-partial or full, in other countries as well as new investment to upgrade the technology and the hardware in the existing mines would continue to be major thrust areas in most of the major steel plants.
The small and medium steel plants in India, who are reeling under the steep rise in prices of raw materials, are thinking in terms of consortium approach to establish a better bargaining power in obtaining raw inputs for production.
The government is planning to place the MM&DR Act during the Monsoon Session of the Parliament. The controversial clause of payment of 26% of net profit of the mining operations for the benefit of the persons displaced due to mining operations is to be further deliberated and may be replaced by the value of the minerals as reported.
This way, the need for separate maintenance of profit and loss account for the mining operations by the Integrated Steel producers may be avoided. But whatever may be the final shape of the 26% clause, the segregation of mining operations from steel making activities may be necessitated by the latest International Financial Reporting Standard (IFRS) stipulations. Although IFRS clauses are yet to be universally accepted and discussions are still on to make it more user friendly, the separation of two accounting systems may be planned for on a longer time perspective. Mining operations for iron ore and coal (may not be for other materials) fetch good margins in view of continual rise in prices as compared to the cost of operations.
The separate listing of mining operations would help capital inflows due to good ratings and therefore minimise the pressure on internal resources of steel plants for investment purposes. In order to avoid adhocism and bring in an element of pragmatism, the market price mechanism in place of cost-plus pricing may be followed while deciding the pricing of the mined product from the captive mines. The opportunity cost of the product, which could otherwise be sold outside, would be the guiding principle for price fixation.
The road map for raw material security for Indian steel producers has not been drawn, although each of the major producers has taken it as the primary focused area of activity. A consortium approach may achieve higher success in owning mines abroad.
The author is DG, Institute of Steel Growth and Development. Views are personal