Why mine auction policy needs a relook

Ashok Kumar Bal | Updated on February 16, 2020

High premium for auction of iron-ore mining leases raises product prices. There is also a chance of market dominance by a few players

The auctioning of mining leases in Odisha has begun and is almost half way through. The current auction of mining leases marks the end of the existing regime and the beginning of a new, anxiety-laden era.

The Mines and Minerals (Development and Regulation) Act was amended in 2015, extending the life of leases of both merchant and end-users. The mining leases of merchant miners, expiring on March 31, 2020, are to be re-allotted through auction, for which the Government of Odisha has invited bids through the tendering process. The government’s initiatives and advance actions are commendable, as they are aimed at ensuring continuity of operation and avoiding disruptions. Odisha is a major mineral-producing State, accounting for more than 50 per cent of the iron ore production in India.

As of now, auctioning of 10 out of 19 working mines has been completed. The offers have been invited trough a two-stage process. In the first stage, the technically-qualified bidders are required to quote their initial price offer. The price offer, a bidding parameter, is the percentage of revenue to be shared with the government. The revenue for the purpose of sharing is the value of the mineral dispatched, an amount equal to the product of the mineral dispatched in a month and its sale price as published by Indian Bureau of Mines.

The technically qualified bidders are ranked on the basis of the descending initial price offer submitted. The highest offer is set as the floor price for the second round of bidding. The highest bidder in second round of bidding will be declared as the preferred bidder.

It is significant to note that the 10 mining leases auctioned so far have fetched a revenue sharing premium of 95.2 per cent, 98.05 per cent, 107.55 per cent, 118.05 per cent, 132 per cent, 135 per cent, 110 per cent, 90.90 per cent, 92.7 per cent, 141.25 per cent, respectively. It is also important to note that out of these, six major mining leases account for 91 per cent of the value of the total estimated reserves and 92 per cent of the volume of the total reserves. With these concluded auctions, there is a significant increase in the share of iron ore production by the end-use steel-makers, and consequently, a sharp fall in the share of merchant miners.

Mine classification

Such exorbitant winning premiums are a matter of concern. The categorisation of mines is a prime cause for such an outcome. The government classifies the mines into two categories — captive and non-captive/open. While some mines are reserved for the captive use of end-users, certain others are earmarked to be in the open category.

While for a mine reserved for the end use, only end-users can bid for their own requirement, the open category blocks can be bid by both captive as well as merchant miners. The exclusivity available in the case of iron ore blocks reserved for end-users is not available to merchant/standalone miners. This has led to the absence of a level playing field in the competitive bidding space, and has put merchant miners in a distinct disadvantageous position.

It may be worthwhile to mention that the concept of captive use, prevalent in India, is globally not practised. The concept and history of captive use was followed during the early days of Independence, when steel-makers needed assurance of resource supply by way of allotment of mines for end-use, at a time when the idea of mining as an independent industry was nascent and not attractive. This concept has limited relevance today, when the idea of resource comfort to an industry is certainly not limited to the allotment of a captive resource base. However, the legacy still continues.

High premium and costs

The revenue share (premium) that a bidder must pay the government is a cost to him. In addition to this, the bidder must also pay royalty and other statutory dues, such as the contribution to the district mineral fund etc, which accounts for about 17 per cent of the sales revenue. Over and above this, the bidder has to pay a GST of 18 per cent. The bids so far have fetched a premium of 95.2 per cent-141.25 per cent. This clearly shows that for every ₹100 a bidder earns, the cost incurred is much more than revenue — in some cases as high as 190 per cent of revenue — and this doesn’t include wages, salaries or cost of operations, leave alone the profit margin. If these are taken into account, the cost will be significantly more than the revenue.

This raises a fundamental question: how will a winning bidder sustain himself? The exorbitant bidding premiums clearly defy any logic and economics. A merchant miner cannot bid premium more than 50 per cent (approximately) to sustain himself. The present auction policy enables and encourages a captive miner to bid a premium much higher than merchant miner, because it is possible for an end-user to absorb the high cost of revenue share in his product price, with the availability of a stream of value-added activities — which are absent in the case of merchant miners. The privilege, possibility and flexibility of accommodating and absorbing the high revenue share as a cost is available only to a captive player.

This also brings forth the important dimension of product pricing of steel-makers in India. In a free market scenario, prices can be increased to absorb the cost and pass expenses on to the consumer. In such a situation, the doctrine of “robbing Peter to pay Paul” works in favour of the captive users, because whatever amount they pay as cost towards revenue sharing is ultimately recovered from the consumer.

Unfair dominance

Classification is the culprit here. But this rigid classification seems to be going away. Today, captive users can sell 25 per cent of iron ore products from their mines in the open market. Earlier, end-users were required to use the minerals extracted from their mines solely and exclusively for self-consumption. Going ahead, the policy may also relax the present cap of 25 per cent.

The distinction between both the categories is getting diluted and becoming irrelevant in changed times. This has given rise to a very disturbing situation, where the space of standalone miners is increasingly occupied by the captive miners. Among the auctioned mines so far, excepting one case, all other mines which were earlier operated by merchant miners now will be owned and operated by the end-users. This may not auger well for the mining industry and the market.

The biggest gainer appears to be the government. The government seems to relish the idea that it will get maximum revenue from successful auctioning at very high premiums. The question is at what cost, and whose cost? Policy is vulnerable to throw up a situation where maximum public revenue may not be compatible with public good. Even the idea of maximum revenue is questionable, because it is dependent upon a single parameter ie the price at which goods are sold, which in this case is the IBM-declared price.

The design and role of market forces, when the number of winning bidders are limited and the sector is heading for a polarised framework with few players dominating the scene, will play a significant role in the coming years in influencing and determining so-called market price. Time will reveal what happens next.

The writer is CEO, Essel Mining & Industries Ltd, and has previously served in the IRS. Views are personal

Published on February 16, 2020

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