India's Steel Giants at Loggerheads with State over Mining Leases

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Researched by Industrial Info Resources India (Delhi, India)--India's steel behemoths, Tata Steel Limited (TSL) (BSE: 500470) (Mumbai) and state-run Steel Authority of India Limited (SAIL) (BSE: 500113) (New Delhi), are likely to run into a fresh trouble in the wake of the state government of Jharkhand ordering the closure of 70% of iron-ore mines, including the ones owned by the duo.

The state government recently issued a notice to shut down 12 out of the 17 operational iron-ore mines in the state. The District Mining Office (DMO) of Chaibasa in Jharkhand has denied the reissue of mining leases for iron-ore mines, which were due for second and third subsequent renewals.

Jharkhand is India's third-biggest iron-ore producer. The state has recorded an output of about 21 million tons during 2013-14. The shut mines, including those of steel majors Tata Steel, produces 5 million tons of iron ore from the Noamundi mine, while SAIL produces 13 million to 14 million tons of ore from its Durgaiburu, Bhudaburu and Kiriburu mines in the state, accounting for an overall 19 million tons. These mines account for about 30% to 40% of the total iron-ore requirement of SAIL, and about 25% of annual ore supply for Tata Steel.

Apparently, the closure of mines is unlikely to have any significant financial impact on Tata Steel and SAIL, as both the companies maintain 30-to-40-day ore inventories at their plants. However, if the ban continues beyond mid-October, external purchases of iron ore could raise the production costs for both steelmakers.

Tata Steel's average iron-ore cost could go up to $50 per ton, as against current captive production cost of $18 per ton. This increase in cost of raw material is likely to have an adverse impact on the profitability of the company, unless the state initiates immediate measures to end the logjam.

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