The steel manufacturers, reeling under a demand-cum-raw material crunch for the past few years, are more in distress after the closure of iron ore mines in Jharkhand and Odisha, thanks to the delay in the renewal process and lack of clarity in approval policies.

Following a government notification on July 18, more than 40 (mostly iron ore) mines in Odisha and Jharkhand, including those belonging to SAIL, Tata Steel, Odisha Mining Corporation, Essel Mining, ACC, Hindustan Copper Ltd, Hindalco Industries and Uranium Corporation of India, had to close down. In these cases, mining lessees had applied for renewals within the stipulated time-frame, but the state government did not decide in time. The inordinate delays by the states to take a decision on the renewals, as well as the inability of the state and the Centre to resolve the issue, led to the judicial intervention.

On July 18, the ministry of mines had issued a notification amending the Mineral Concession Rules, 1960. This amendment provides a period of two years for execution of the renewal lease deed, (post expiry of lease), for the first renewal. But it does not provide any such period for second and subsequent renewals. The ramifications of this amendment was neither discussed with stakeholders nor considered by the ministry, say industry watchers.

“There is an urgent need for the government to resolve the crisis that has engulfed the mining sector and to ensure that the genuine players and investors do not suffer. Ensuring raw material security is imperative to safeguard the large financial commitments made in the mines which have been closed. The government must create an enabling environment to encourage future investments in the mining sector”, said Sushim Banerjee, director general at the Institute for Steel Development & Growth (INSDAG).

The ongoing back and forth moves between the state and the Centre on the interpretation and the subsequent consequences of the said notification, has only amplified the already stressful situation of raw material security for critical end-user sectors such as steel. The closure of mines has a considerable impact on the iron and steel industry, which is a critical foundation industry for sectors such as infrastructure and manufacturing. Iron ore production in the country has come down from 218 million tonnes (mt) in 2009-10 to 144 mt in 2013-14. In lieu of the expected shortage, captive miners have been forced to rely on existing inventory and imports to meet raw material requirements.

Recently, the Odisha government, acting on an interim court order, has agreed to let Tata Steel resume mining from four key iron ore mines in the state. The closure of mines has forced Tata Steel to import 2.3 million tones of Australian ore and buy about 0.8 mt from steel miner NMDC in the last three months to run its more than 100-year-old steel plant in Jamshedpur, said a recent report.

According to analysts, assuming that all Tata Steel and Sail iron ore mines in Jharkhand and Odisha are shut for the next six months and both companies import iron ore, their book values will take a hit of 2% and 6%, respectively.

A Goldman Sachs report of September 8 said, the incremental cost of importing iron ore, worth an estimated R1,365 crore ($228 million) and R3,885 crore ($648 million) in FY15, for Tata and SAIL is likely to impact their profits after tax by 18% and 97%, respectively. In order to not cause a complete cessation of mining operations by genuine and large-scale companies, it is imperative for the states and the Centre to align on key policy issues.

Given the potential of the draft Mines and Mineral Development and Regulation (MMDR) Amendment Bill 2014, the absence of any suggestions to resolve the deadlock between the state and the Centre on lease renewals and subsequent closure of the mines comes as a surprise to industry.

“An important legislative tool such as the draft MMDR Amendment Bill 2014 should address key sector concerns such as lease renewals that have led to the closure of mines. Besides impacting raw material availability and input costs, the closure of mines has a direct impact on the livelihood of those working in these mines, and indeed has a cascading effect on employment across industries”, said DRS Chaudhary, former steel secretary at the ministry of steel.

In addition to the impact on industry, the closure of mines in Odisha is likely to have a significant impact on the revenue of the state itself. The shortfall in mining revenues is notable–until October this year, the state has generated revenue of R2,343 crore through mining, as against R3,077 crore last year.

The closure of mines has had a significant impact on the overall employment in these mineral rich states. The mining sector has the potential to create 15 million jobs. The sector feeds into foundation industries such as steel, which in turn impact other labour intensive sectors such as infrastructure and manufacturing.

Status in Odisha

Of the 50 iron ore and manganese mines operational in April 2014, as many as 26 had to close down following the the Supreme Court order. The closed mines accounted for about 30% of the iron ore produced in the state in FY14. The total production in FY14 was 78 mt.

Status in Jharkhand

Jharkhand had 17 operational iron ore mines, out of which 12 closed due to the July 18 notification from the ministry of mines. These 12 mines accounted for over 22 mt production in the state in FY14.

The July 18 notification from Centre led to the closure of more than 40 mines in Odisha and Jharkhand, including those belonging to Sail, Tata Steel, Odisha Mining Corp, Essel Mining, ACC, Hindustan Copper, Hindalco and Uranium Corp.

Iron ore production in the country has come down from 218 mt in FY10 to 144 mt in FY14.

According to Goldman Sachs, the incremental cost of importing iron ore could impact the PAT of Tata Steel and Sail by 18% and 97%, respectively.