Mineral royalty hike: States to reap revenue bonanza

DEBABRATA DAS RICHA MISHRA New Delhi | Updated on November 25, 2017 Published on August 21, 2014



Metal and mining industry to take a hit on profit margins

The profit margins of companies such as Steel Authority of India, Tata Steel, and JSW Steel, which are into the business of metal and mining of minerals such as iron ore, will take a hit with the Government increasing the royalty rates across the States.

This move is meant to boost the annual revenue for States, but will increase production costs across the metals and mining industry. The royalty to mineral-rich States such as Jharkhand, Odisha, Goa, Chhattisgarh, Maharashtra, would increase by 41 per cent from ₹9, 406 crore (2011-12) to ₹13,274 crore (estimated), according to the Ministry of Mines.

For iron ore, the royalty has been raised to 15 per cent from 10 per cent earlier. Manganese ore – a key input for steel makers – will now have a royalty of 5 per cent as against 4.2 per cent earlier, while for bauxite it has been increased to 0.6 per cent from 0.5 per cent.

In fact, Wednesday’s decision of royalty hikes is expected to help States recover revenues losses incurred due to illegal mining as pointed in the Justice MB Shah Commission on Iron Ore mining.

“A decision taken by our Government for royalties on minerals will benefit Jharkhand by ₹400 crore a year,” Prime Minister Narendra Modi said in Ranchi, where he inaugurated a major power project.

The Commission had in its reports on Jharkhand, Odisha and Goa mining recommended recovery of large sums of money from illegal mining. For example in Jharkhand’s case, the Commission recommended that about ₹14,500 crore be recovered from miners due to environmental violations alone.

Analysts estimate that iron ore miners will take a hit of around around 5.5 per cent per tonne on profit margins. But, the situation is worse for steelmakers with large captive mining operations.

Steel hit

Mumbai-based brokerages estimate SAIL to take a 12-15 per cent hit on its net profit while for Tata Steel the impact is seen to be around 3-4 per cent. Jindal Steel and Power and JSW Steel are expected to take a hit of 2-3 per cent and 5-7 per cent on net profit respectively, as a result of the royalty hikes.

“For steelmakers, it is a double whammy. On the one hand, the cost of their captive mining activities goes up and on the other there would be hike in the prices of raw materials they purchase,” said a metals and mining analyst with a foreign brokerage firm in Mumbai.

Stock impact

While, the move was expected in Dalal Street ever since Finance Minister Arun Jaitely said royalty rates would be revised soon during his Budget speech in July, share prices of metals and mining industry were impacted on Thursday. The S&P BSE Metal Index closed 1.35 per cent lower on Thursday. Amongst steel companies, SAIL’s shares took the biggest hit, closing 3.17 per cent lower at ₹83.90, Tata Steel closed 1.62 per cent lower at ₹536.60, JSPL closed 1.80 per cent lower at ₹292.20 and JSW Steel closed 0.94 per cent lower at ₹1,274.65.

Miners fared relatively better with NMDC’s shares closing 0.71 per cent lower at ₹174.95, Sesa Sterlite closing 1.73 per cent lower at ₹289.65, Hindustan Zinc closed 1.27 per cent lower at ₹167.35 and Hindalco closed 1.36 per cent lower at ₹177.85.

Published on August 21, 2014
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