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Expiry of iron ore leases could disrupt domestic supply
Non-integrated steel mills’ margins at risk; JSP and JSTL could be impacted
Iron ore mining activity could see a major disruption in India if the transition after expiry of leases in Mar’20 is not smooth. It could push up iron ore costs for domestic non-integrated steel mills higher by ~INR2,000-3,000/t. Further, if it gets accentuated by the current weakness in the steel market, some players may come under financial stress. While there remains a probability of supply side disruption, there is hope that the government will take necessary steps to ensure a trouble-free transition. JSP and JSW Steel will be at risk in the near term.
Leases for ~50-70mtpa of iron ore production set to expire in Mar’20
Merchant mining leases that have completed 50 or more years as at end-Mar’20 will not be renewed and will be auctioned – according to the amended Mines and Mineral (Development & Regulation) Act, 2015. Due to expiry of leases, it is estimated that ~50-70mtpa of India’s iron ore production will be impacted, which represents ~25-35% of the total production.
* See bottlenecks to a smooth transition
Our interactions with industry participants revealed many bottlenecks in the way of a smooth transition after the expiry of leases.
* Environment and forest clearance:
The Supreme Court order in case of iron ore mines in Goa states that all new/auctioned leases will have to take fresh EC/FC. In the normal process, these clearances take about two years. The government is working on a draft proposal to fast-track the clearances (within 6 months). However, fast-track clearance will be possible only if there is no change in the mining scheme, mining plan, production capacity, and mining lease area. This could be an issue for new owners who would like to re-plan to optimize the mine for the price it pays in auctions.
* Land acquisition:
Transfer of privately owned land from the erstwhile owners is unlikely to be smooth. Given their bargaining position, to ensure smooth mining for the new owner, they could demand a higher price. Based on records of expiring iron ore leases in Odisha, the portion of private land is not material. But, we are uncertain that private land is a critical part of these leases (housing the processing plants or in-ward/out-ward movement).
G2 level exploration is required before a mine can be auctioned. The onus of doing the exploration is put on the existing lessees, who have no incentive to conduct a fair exploration. Faulty records, based on which auction will be conducted, could lead to litigations later and delay mining.
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