Shares of iron ore producers, including Sesa Sterlite and state-owned NMDC, were in the limelight after the passing of the mining ordinance on Monday.

The ordinance opens up iron ore mining to more players through a transparent auction process and is set to benefit the steel industry.

Iron ore scarcity

Steel makers are currently battling iron ore scarcity as the output has been low due to mine closures.

In the past, mining bans in states such as Goa and Karnataka have reduced the country’s iron ore production to 140 million tonnes in 2012-13 from 207 MT in 2010-11. The output inched up to 152 MT in 2013-14 after the ban was partially lifted and few mines in Karnataka started production.

But many mines in Goa and Karnataka still remain closed. Added to this, there were recent mining bans in Odisha – which accounts for 60 per cent of the country’s iron-ore production – and in Jharkhand – the third biggest iron-ore producer. So, the output for 2014-15 is likely be very low.

Iron ore requirement is projected to nearly double to 392 MT over a decade as per the National Steel Policy draft. The Steel Policy draft therefore advocates allocating prospected mines to steel producers through open bidding as well as putting up more mines for general bidding.

Supply constraints

Due to supply constraints, local iron ore prices held firm even as global iron ore prices were cut in half in 2014.

NMDC had raised the prices of its lower quality ore (known as fines) by nearly 10 per cent in 2014. But due to the large price slump, steel makers are finding that local prices - which were at 30-40 per cent discount to international prices a year ago – are close to import prices now.

This coupled with any easing in the tight supply constraint dims the prospects of listed ferrous miners. Already, NMDC had cut ore prices - 1.5 per cent on low grade ore (fines) and 4 per cent on higher grade ore (lumps) – in December.

Iron ore producers' margins

The ordinance may also hit the margins of iron ore producers. The ordinance proposes establishing a trust called the District Mineral Foundation to work for the benefit of those affected by mining related operations. Going by the precedents set in Goa and Karnataka, it is likely that 10 per cent of the sale proceeds would be paid by miners towards a fund, affecting the bottom line.

Among the listed miners, NMDC may be more directly hit by the ordinance, while the impact on Sesa Sterlite is likely to be less. NMDC is the country’s largest iron-ore producer, accounting for nearly a fifth of the output. Due to mining restrictions in Goa and Karnataka, the share of iron-ore in Sesa’s revenue is under 10 per cent.

That said, Sesa’s prospects would however be hit by the slump in global demand and prices. This is because its ore from Goa is of low grade, unsuitable for local steel making and is therefore exported. ​

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