Opinion

How ore auctions undermine market

Ashok Kumar Bal | Updated on May 12, 2021

The current round has skewed the market in favour of captive users vis-a-vis merchant miners

The March 2021 amendments to the MMDR Act are expected to bring in transformative reforms for the Indian mining sector. Odisha, with huge iron ore resources, has already completed the first phase of iron ore auctions in 2020 and the next lot of auction is in the offing.

There are a few lessons from the previous auction. First, the 2020 auction gave rise to exorbitantly high winning bids, which are irrational and unsustainable. It witnessed bids in terms of revenue sharing premiums ranging from a low of 90.9 per cent to the highest of 155 per cent.

Revenue share is one component of the cost, the others being royalty, District Mineral Fund, National Mineral Exploration Trust, besides the cost of production itself which nearly accounts for an additional 25-30 per cent.

Such irrational bids of paying more than one earns, defies logic. The government seems to be euphoric that it would earn more revenue than the auctioned value of reserves during the lease period with negative returns to the miners. An analysis of Ministry of Mines statistics, based on data from auction of 103 blocks, shows that the total revenue to State governments is around ₹8.3-lakh crore vis-à-vis an estimated resource value of ₹8.04-lakh crore.

But sustainability of such a scenario is questionable for how can one pay more than one earns?.

Second, the mining space has witnessed an undesirable shift making it skewed, distorted and polarised. The space has been cornered by the end-users whereas the merchant miners have been relegated to the background. In Odisha, of the 1,942 million tonnes (mt) of iron ore reserves auctioned in the first phase, about 319 mt have been surrendered. Of the remaining 1,623 mt, end-users have bagged almost 1,450 mt, accounting for 85 per cent of the total reserve.

Merchant, or standalone, miners who had 100 per cent of these reserves in the pre-auction regime, now account for only 15 per cent. The classification of mining leases was the culprit. While captive mines were reserved exclusively for the end-users, the non-captive mines were open to both merchant as well as end-users. The end-users thus had the benefit of bidding for both categories of mines, whereas the standalone miners were eligible only to bid in the open category mines.

The outcome was the end-users bagging most of the blocks. The skewed access and entitlement led to an irreversible distortion and absence of a level- playing field.

Third, the unsustainability of high bids has resulted in five out of the 21 auctioned mines having been surrendered or taken back by the government. All these mines were in the open category. Six bidders have not been able to commence production till date. This leaves only 10 mines wherein production could be commenced.

The tender stipulation that in the first two years the successful bidders should produce at least 80 per cent of average production of last two years have not been met by any of the bidders. This has led to the violation of the Mine Development and Production Agreement.

A rough estimate indicates that against the current EC capacity of about 56 mt iron ore of such auctioned mines, only 20 mt was produced during FY21, which is expected to increase to around 38 mt in the coming year.

The fourth lesson is that the standalone miners have become a vanishing species. Mining may no longer be an independent industry which is inconsistent with global practice. Iron ore mining in India has now become an appendage and adjunct of steel manufacturing.

Finally, it has led to a situation where the resource availability and assurance to the end-users is sought to be satisfied through the linkage of owning mines, captive or otherwise. The option of alternative resource linkage like the one by way of a fuel linkage supply arrangement in case of coal seems to have been ignored. Ownership of mines as a source of secured resource availability or assurance gets undue preference over the alternative approach of meeting the same objective. This is worrisome.

Too little, too late

By removing the distinction between captive and non-captive and providing additional payout by way of additional royalty on open market sales by captive miners, this asymmetry is sought to be addressed. It is however, too little and too late. The policy and legal framework have given rise to a much distorted marketplace where there are various categories of players. They are: (a) PSU merchant miners like NMDC and OMC, (b) PSU end-users like SAIL, (c) Non-auctioned captive mines, (d) Auctioned captive mines, (e) Auctioned merchant mines, and (f) Pre-auctioned continuing merchant mines.

As far as PSU mines (both captive and merchant) are concerned, they enjoy the privilege of lease extension without subjecting themselves to the auction process. This privilege by virtue of the current amendment comes with a moderate cost of additional royalty for sale in open market, the auctioned captive miners would pay 50 per cent over and above the normal royalty for sale in excess of 25 per cent of production up to 50 per cent.

The non-auctioned captive miners will also pay additional royalty of 150 per cent or 250 per cent depending on the type of product. The additional royalty mechanism, however, does not provide a level-playing field in an already distorted mining space.

An analysis shows that the total statutory liability, after factoring additional royalty, as a percentage of the sale price, is very wide across various categories of mines mentioned above ranging from as low as around 20 per cent to as high as 175 per cent showing an unusual differentiated cost structure reconfirming absence of a level-playing field.

Going forward, the end-users will continue to benefit from the auction by virtue of their having the option and flexibility to absorb the higher cost of revenue sharing in their product prices. The recent amendment may bring some sobering effect on the bidding numbers but this may not address and correct the distorted structure.

The sector is entering into a highly polarised framework where a few dominant players will have control over the resource base as well as finished products. The emerging scenario may worsen the plight of intermediate players like pellet and sponge iron manufactures who have been dependent on merchant miners for their requirements. They will now be at the mercy of big end-users. Their cost of procurement and ultimate viability will be a matter of concern. In such a scenario, the character and composition of players can hardly be termed as genuinely competitive in any future auction.

Survival of the fittest appears to be the new paradigm. In the whole process, irrespective of the fact as to who gains, the inescapable truth is that the burden will fall on the consumer who is going to be the ultimate loser.

The writer is former Civil Servant

Published on May 12, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor