Karnataka-based KIOCL (formerly Kudremukh Iron Ore Company Ltd), a wholly state-owned enterprise operating under the Union steel ministry with Miniratna status, was struggling to run its pellet plant after shutting its captive iron ore mine covering 4,065 hectares in the Kudremukh belt in Karnataka following a Supreme Court directive in 2005. Since then, KIOCL, once the largest iron ore exporter in the country, has started procuring the material from the outside market. Now the company has taken new steps to diversify its business while also acquiring new iron ore mines in different states to ensure the cheap supply of raw material to its pellet plant. KIOCL has also taken a few steps to bring down the cost of production at its pellet and blast furnace plants through expansion programmes. In an interview to FE?s Jaishankar Jayaramiah, KIOCL?s chairman & managing director K Ranganath discusses the company?s future plans. Excerpts:

How are you managing raw material supply after shutting your captive iron ore mines in Karnataka following the Supreme Court order?

It?s little difficult to run our pellet production facility as it requires iron ore as a major raw material. The input cost increased as we were forced to procure the material from outside after closing our captive mines in 2005. We are procuring iron ore through long-term contract with NMDC, but still the prices are higher compared with ore supplied from our own captive mines earlier. Currently, NMDC supplies iron ore at around $50 per tonne against the spot market price of $95-118. But if we have captive mines, ore can be availed at $15 per tonne.

What steps have you taken to come out of this crisis?

We have applied to the Karnataka government to allot iron ore sites as our major plants?pellet and pig iron production facilities?are operating in the state. We have also applied to the governments of Orissa, Chhattisgarh and Rajasthan for mine allotment. The Karnataka government has recommended iron ore mining lease in an area covering 116 hectares in Chikkanayakanahalli taluk in Tumkur district. The Union government has granted us prior approval of mining lease and we also have the environment clearance. We are now waiting for the forest clearance. The Chikkanayakanahalli mining area has around 10 million tonnes of iron ore deposits. If we are through with this project, iron ore mined from here would meet the requirements of our manufacturing plants for another three years. In addition, Karnataka government has given formal approval to mine in the Ramanaduraga region that contains around 150 million tonnes of iron ore. But the state government has not given the final approval to mine in the region because a petition regarding mine allotments in this area is pending before the Supreme Court for disposal.

Are you looking to diversify the company?s business?

The company has decided to establish a spun pipe plant to use the hot metal running into blast furnace unit (BFU) that currently produces pig iron. Currently, we are running into losses by producing pig-iron, as the cost of the basic raw material?coke?has increased. We are incurring the loss because the current market price for pig-iron is a meagre Rs 18,000 per tonne against the coke price of Rs 21,000 per tonne. The current capacity of BFU is 2 lakh tonnes. A part of hot metal produced for BFU could be diverted to manufacture spun pipes. The spun pipe manufacturing plant will have a capacity of 1 lakh tonne per annum. Pipe manufacturing would be more lucrative than producing pig-iron. This project would require an investment of Rs 300 crore.

What are your other plant-level expansion plans?

The company has decided to set up a coke oven plant. This is to convert coal into coke. Instead of buying coke from the outside market at a high price, we can buy locally available coal and convert it into coke for our usage at a lower cost. This would bring down the cost of coke to $150 per tonne. Moreover, we don?t have our own sidings. Our pig-iron customers are located in the hinterlands of Tamil Nadu and Gujarat and a small quantity of pig-iron could be moved through railings. So, we are planning to construct a railway line between Toukur and our plant in Mangalore. A detailed project report is in progress and Konkan Railway is attending to the project. Besides, the company has plans to instal a pressure filter plant to reduce moisture in the pellets. While reducing moisture, this process will add strength to the pellet, enabling us to fetch a higher price in the international market. For all these expansion programmes we have lined up and the new spun pipe plant, the company would require an investment of Rs 1,000 crore. We have enough internal resources to meet this investment need?the company currently has a cash reserve of Rs 1,200 crore.

KIOCL has proposed to set up a steel plant. What is the status of that?

Yes. We have plans to set up an integrated steel plant in Karnataka. The plant would be a joint venture with another partner. The cost of the project would be around Rs 8,000 crore. In the first phase, the integrated steel plant will have an annual capacity of 2.5 million tonnes of steel, which could be expanded to 5 million tonnes in the second phase. We are working out the project to expand the manufacturing capacity in the proposed plant to up to 15 million tonnes. We are making progress in identifying partners who have the expertise in steel manufacturing. After finalising partners and other parameters of the project, we will apply to the government to allot captive iron ore mines for the steel plant, as we will be adding value to the iron ore mined from the state.

Last year, you shut your pellet plant for some period. Why?

Yes, we closed the pellet plant operations during different periods in the last year due to a decline in global pellet prices. In fact, the pellet plant accounts for 90% of the total revenue of KIOCL. The company exports 50% of the pellet manufactured in the plant while the remainder has been supplied to the domestic market. Pellet prices, which touched its peak of $245 per tonne in September 2008, tumbled to $54 in December 2008. Generally, we used to produce 2.65 million tonnes of pellet against the plant?s total capacity of 3.5 million tonnes. Due to recession, the pellet production declined to 1.31 million tonnes in 2008-09. Hence, we halted operations for some time. Now, since December 2009, the pellet plant is continuously running as prices in the international market are moving up. Currently, pellet prices are hovering at around $118 and it may stabilise at $135 levels in the next four to five months.