With leases for a number of merchant mines set to expire in March 2020, steel makers without captive mines, which account for about 75% of the domestic production, are likely to face up to 20% increase in costs.
This would put pressure on profitability of these companies, leading to a 300-400 basis point (3-4 percentage points) fall in Ebitda (earnings before interest, tax, depreciation and amortisation) margins in 2020-21, according to a new report by Crisil
In March 2020, leases for more than 30 iron ore mines, which account for nearly 62 million tonnes (mt) of ore — comprising 50-55% of Odisha’s output and 10% of other states’ production of around 10 mt — are expiring. This could lead to a 30% reduction in overall iron ore output. Significantly, all these leases are held by merchant miners.
The report said that with the expiry of iron ore mining leases nearing, there is some uncertainty about the completion and scheduling of auctions for or G2 exploration licences.
Three possible scenarios could emerge, it said. In the base case, assuming auction takes place in the third quarter of 2019-20, prices are predicted to go up 15-20% in 2021 with limited supply disruption. If leases are extended by two-three years for existing mines, there will be no supply disruption.
However, if there is a delay in auctions, which are open to both captive and merchant miners, large steel players shall bid higher premiums to ensure long-term supply leading to higher iron ore costs for them. The entire supply of 60 mt will come to a halt until new clearances are received leading to iron ore imports at higher prices,” the report said.
In 2018-19, domestic production of ore is estimated to have been around 207 mt.