Industry Risk Score : Iron Ore Mining

During FY19, iron ore production was estimated at 207 million tonnes (MT) with imports aggregating at ~13 MT. India continues to import iron ore despite having the world’s fifth largest iron ore deposits. The domestic iron ore prices are being largely dependent on the country’s steel sector dynamics with lower exposure to the iron ore prices prevalent in the international market.

Odisha leads in terms of total domestic production accounting more than half of the total output, followed by Chhattisgarh, Karnataka and Jharkhand. Other states which comprise production include Goa, Andhra Pradesh, Maharashtra, Madhya Pradesh and Rajasthan albeit at a lower proportion. The Indian iron ore mining industry is marked by disparities owing to varied state dynamics involved in production. Further, the commodity which is primarily used as a raw material in steel production is highly exposed to volatility in the steel industry. In fact, since steel being a cyclical industry which is sensitive to the business cycle of economy, during periods of growth slowdown has a cascading effect on the iron ore industry and its associated players. Subsequently, the revenues from the industry are generally high during economic prosperity and expansion.

Going ahead, demand for iron ore is expected to pick up despite lately the economy witnessing a slowdown. The positive outlook is supported by expected growth in steel-intensive sectors such as infrastructure, construction and housing. Further, government’s initiatives such as the National Steel Policy, 2017, are likely to support the industry in terms of increased demand albeit over medium to long term horizon. Over the short term, with domestic economy facing headwinds with dwindling GDP, and the stress in the automobile and infrastructure sectors, overall demand in the steel industry is expected to be lower which in turn is expected to trim the demand for the iron ore industry. Further, with a major disruption expected in 2020, where leases of around 334 mines (49- working mines and 285- non-working mines) are set to expire by March 2020, it calls for early addressing of the issue and is likely to remain a key monitorable as well.

Consequently, the Indian iron ore mining industry is likely to face headwinds in the short term, on account of tapering economic growth coupled with the slowdown in steel industry. Auctioning of mining leases too presents a case of prudent monitoring of the industry with respect to supply issues, if any.

Key Risks & Attributes

• Economic growth of the country affecting steel consumption
• Auctioning of mining leases
• Adverse government regulations with respect to mining
• Production limits approved under environment clearance.

During FY19, iron ore production was estimated at 207 million tonnes (MT) with imports aggregating at ~13 MT. Being a key raw material for steel production, growth in steel-intensive sectors such as infrastructure, automotive, housing and consumer durables drives demand. In fact, during FY19, India's crude steel production grew by around 3% y-o-y to 106.6 million tonnes (mt) from 103.1 in the previous year.

Going ahead, the steel industry in India is expected to witness uptrend driving iron-ore demand. The National Steel Policy plans to have available steel manufacturing capacity at 300 million tons by 2030. Moreover, production is forecasted at 255 MT and a robust finished steel per capita consumption of 158 kgs is expected by 2030-31, as against the consumption of around 61 kgs during 2017. The policy also envisages to domestically meet the demand of high grade automotive steel, electrical steel, special steels and alloys for strategic applications.

With a major disruption expected in 2020, where leases of around 334 mines (49- working mines and 285- non-working mines) are set to expire by March 2020, it calls for early addressing of the issue and is likely to remain a key monitorable. Notwithstanding, merchant miners are likely to accelerate extraction from mines headed for expiry on March 31, 2020. Further, spike in global seaborne iron ore prices can also shore up demand in the country, albeit at a lower level. Mines in Odisha and Chhattisgarh generally produce higher grade iron ore but are plagued with inventory pile-up issues due to insufficient evacuation logistics. On the other hand, mines on the western side viz. Goa and Karnataka are of lower grade.

China is the primary destination absorbing most of the iron ore exports. Japan, Oman, Italy and South Korea are the other key export markets, but with significantly lower volumes. Exports in 2018 fell to ~18 mt compared with 29 mt in 2017. Iron ore fines, lump and pellets too followed the pattern. The import/export dynamics are affected by the logistics cost for steel plants located on coastal locations. Players prefer to import rather than buying at inflated domestic prices which is underpinned with a low import duty of ~2.5%. On the contrary, if reduced spreads are prevalent between landed cost and domestic prices, and higher exchange rate players are discouraged to import.

Acuité expects that the demand for domestic iron ore will be contingent on domestic steel demand, which can witness headwinds with economic growth tapering. Further exports scenario will be dependent on Chinese demand to which the industry primarily caters to as the country is lately witnessing a moderation in growth on account of the ongoing trade wars.

The industry is exposed to intra-state, inter-state and global competition. The quantity and quality of ore, production cost controls and logistical cost advantages are the key factors affecting competition.

Odisha produces more than half of the country’s iron ore, and the other states including Chhattisgarh, Karnataka and Jharkhand together make up for more than 90% of the domestic iron ore production. The intra-state competitive intensity is relatively moderate as large steel producers such as Tata Steel and SAIL meet large part of their requirement through captive mines. In fact, owing to economies of scale these players have the ability to absorb higher logistics cost of imports or sourcing from other state mines.

NMDC is the single largest non-captive iron ore producing company domestically, having around 20- 25% market share. Players such as Vedanta, Fomento Resources and VM Salgaonkar have been the largest exporters from Goa. Rungta Mines, Indrani Pattnaik, KJS Ahluwalia, Kaypee Mines and Serajjudin & Co are the largest players in Odisha. NMDC is also one of the largest miner in Chhattisgarh while the company along with Kudremukh Iron Ore, Vedanta and BMM Ispat are some of the largest players in Karnataka.

The industry faces risk from its direct substitute steel scrap. The charge mix of EAF/IFs can be altered to house different proportions of scrap depending on the availability and cost dynamics and will remain a key monitorable. With 100% foreign direct investment allowed in the mining and exploration of metal and non-metal ores under the automatic route the sector is yet to witness significant foreign participation.

Acuité believes that the competitive intensity in the iron ore mining industry will continue to persist albeit moderately. Capital-intensive business having high regulatory barriers can however discourage high competition in the industry going ahead.

Mining leases are auctioned for long term (usually exceeding 20 years), which allows a specific maximum quantity to be mined from the lease area. Thus, distance of iron ore mines relative to the market and the cost of rail infrastructure act as the main determinants. In fact, mining is a high-volume, low-margin business owing to the value of mined iron being significantly lower than base metals. Consequently, being a high capital business and requiring significant investment in infrastructure limits extensive participation.

With a major disruption expected in 2020, where leases of around 334 mines (49- working mines and 285- non-working mines) are set to expire by March 2020, it calls for early addressing of the issue and is likely to remain a key monitorable. Notwithstanding, merchant miners are likely to accelerate extraction from mines headed for expiry on March 31, 2020.

Acuité believes that the input-related risk in the iron ore mining industry is relatively moderate with auctioning of leases to remain a key monitorable.

The mining industry is highly exposed to the government regulations and is contingent to the same for its proper functioning. In fact as discussed in the aforementioned sections, leases of around 334 mines are set to expire by March 2020, and it calls for early addressing of the issue. Any delay is likely to affect availability of the raw material thus having cascading effect on the end use industries primarily the steel sector. The state governments are to conduct auctions as per the provisions, rules and guidelines in Mines and Minerals (Development and Regulation) Act, 1957, and the Mineral (Auction) Amendment Rules, 2017. Further, the industry also has to oblige with environmental clearances which are very stringent.

The Directorate General of Mines Safety is the regulatory body responsible for supervision and enforcement of mining rules. Regulatory vigilance on the sector is stringent, and several NGOs actively file litigations against miners for environmental damage, displacement of people and loss of traditional livelihoods, among others.

Acuité believes that since the sector pertains to very stringent regulatory norms, any adverse policy changes can cripple the production and the industry as a whole.

Automation provides a significant safety advantage by reducing the number of employees exposed to potential health and safety hazards. It also improves mining productivity, provides long-term operational stability and tighter control over costs which ultimately help sustainability of business.

Despite the industry majorly functioning at a manual level, the country’s biggest miner, NMDC is operating three highly mechanised iron ore mine complexes; two in Bailadila, Chhattisgarh, and one at Donimalai, Karnataka. Further, the company has also established a well-equipped centre for geo-statistics. Nowadays, miners have their trucks fitted with GPS helping them to reduce time lags and improve logistics planning as the mined ore can be monitored on real time basis.

Acuité believes that the Indian iron ore players would continue to persist with manual operations atleast in the short term, as labour availability is adequate. However, in the long term, to remain globally competitive, they would require a simultaneous transition to automation.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Unfavorable)

Debt/ Equity
(Favorable)

GCA days
(Marginally unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale