Odisha iron ore auction next week may get tepid response

The Odisha government may not be able to generate big revenue from the eight iron ore mines that will be put on the block next week given the weak financials of steel companies.

Moreover, most of the steel companies have drawn major expansion plans and have already committed huge capex for the same.

As per the Mining and Mineral Development Act, about 24 operational merchant mines will shut operations in March, 2020 and will be put on the block.

The eight iron ore mines, which will be auctioned next week in Odisha, have reserves of about 573 million tonnes.

JSW Steel, one of the few large steel companies with limited captive iron ore sources, may not commit a huge premium for Odisha iron ore blocks, said sources close to the company.

After aggressively bidding and acquiring three Category-B iron ore mines in Karnataka last month, JSW Steel is expected to tone down its aggressiveness in Odisha. The company is also the highest bidder for the three large iron ore mines put on block in Karnataka by agreeing to pay 100 per cent premium.

An email sent by BusinessLine to the company remained unanswered.

The logistics cost for JSW Steel to procure iron ore from Karnataka will be much lower as the mines are located near the plant. Currently, JSW Steel has a total of 18 mtpa installed capacity and target to reach 45 mtpa over the next decade.

The company requires about 25 mtpa of iron ore for its flagship 12 mtpa Vijayanagar steel plant in Karnataka. The company has set aside ₹1,000 crore for securing its iron ore requirement through captive source.

The steel industry is expected to limit its premium to maximum of 25 per cent to 30 per cent for the merchant leases as the demand is weak. Hence, there is a potential risk to pay a huge premium for Odisha iron ore blocks, said a senior official of a steel company.

He said the capital cost for developing iron ore mines in Odisha will be higher due to setting up of slurry pipelines or railway siding or conveyor in case of mines producing over five million tonnes as prescribed by the National Environmental Engineering Research Institute. Almost all the mines in Odisha have a production capacity of over five mtpa.

At present, the mining companies has no minimum production obligation. However, after the auction the winning bidder has to mandatorily produce minimum 80 per cent of the mines rated capacity to ensure steady income for the State. This will push up availability of iron ore post-auction. With no proper logistics infrastructure, handling of such huge production will be a challenge.