Industry Risk Score : Metals Iron Ore Mining

Executive Summary

India is the fourth largest iron ore producing country with a share of 7-8% of global production6. Iron ore production in India increased by 21.5% to 192 million metric tonnes (mn mt) in FY 2016-17 from 155.9 mn mt in FY 2015-16. Odisha was in the lead with 52% of total domestic production, followed by Chhattisgarh (16%), Karnataka (14%), and Jharkhand (11%). Remaining 7% was contributed by five states: Goa, Andhra Pradesh, Maharashtra, Madhya Pradesh, and Rajasthan1.

The Indian iron ore mining industry is marked by disparities in state-wide dynamics. Odisha, Chhattisgarh, Karnataka, Jharkhand and Goa are the top five iron ore producing states in the country, accounting for 95% of the domestic production7. Demand scenario for iron ore is expected to brighten with expected growth in steel-intensive sectors such as infrastructure, automotive, and construction, government projects that emphasise domestic steel procurement as also the thrust from the National Steel Policy22. However, regulatory challenges remain an overhang, an example being the recent cancellation of all 88 mining leases in Goa, which has completely halted mining in the state since April 20187, 16. Inventory build-up at mines due to logistical constraints affecting evacuation is an issue faced by miners in central India, while in Karnataka, mandatory sale of iron ore through the e-auction mechanism and export curbs have affected miners. Further, Indian miners are reluctant to invest heavily in technology, though automation is transforming mining globally.

Global iron ore production in 2016 stood at ~2,224 mn mt, which grew to ~2,380 mn mt in 20176. Global supply is dominated by four big players – Vale, Rio Tinto, BHP Billiton and Fortescue – who together accounted for nearly 70% of the global sea borne iron ore market in 201722.

With the world’s largest iron ore resources, Australia dominates the global exports with ~40% share of global exports. Brazil is the largest producer and exporter of iron ore with 17-18% share. China is the third largest producer and largest importer accounting for nearly 60% of global imports. Consequently, it is the biggest influencer of global iron ore benchmark prices6.

Acuité believes the Indian iron ore mining industry will register moderate growth in FY 2018–19 on account of positive domestic steel industry scenario. However, inventory pile-up issues, export duties and regulatory curbs continue to remain an overhang, reducing mining industry’s attractiveness.

Key Risks& Attributes

  • Iron ore prices are based on international benchmark prices, and also on alumina and other waste content
  • Economies of scale essential for effective cost controls
  • Quality, type and location of mineral reserves are important
  • Licence requirement and need for environmental, other regulatory clearances.

Demand & Supply Scenario



Iron ore is the key raw material for steel production. Growth in steel-intensive sectors such as infrastructure, automotive, housing and consumer durables is driving demand for steel intermediates. Growing urbanisation coupled with rising income levels of the burgeoning Indian middle class and improving power availability are also aiding growth of the metals and mining sector. Demand for iron and steel is set to continue to grow, given the launch of various government initiatives such as Make in India, freight corridors, Smart Cities Mission, rural electrification scheme and Housing for All by 2022 that emphasise the procurement of domestically manufactured iron and steel products. Further, the Government of India has imposed multiple restrictions on steel imports, such as anti-dumping duty and minimum import price, which has also helped the domestic steel production to rise22, 25. Consequently, domestic iron ore consumption increased to ~142.5 mn mt in FY 2016-17 from ~126.8 mn mt in FY 2015-167.

Per capita steel consumption in the country is very low at ~60 kg compared with the world average of 208 kg and China's at 490 kg. This indicates a huge growth potential for the domestic steel industry25. The Ministry of Steel aims to increase steel production capacity to 300 mn mt by FY 2030-31 from 128.28 mn mt in FY 2016-17, indicating new opportunities and scope for new mining capacities in the sector22.

China is the primary destination absorbing most of the iron ore exports. Japan, Oman, Italy and South Korea are the other export markets, but with significantly lower volumes. Exports trending at 16-18 mn mt in FY 2013-14 fell to 7.3 mn mt in FY 2014-15 and further to 5.4 mn mt in FY 2015-16 due to the mining bans in the country to tackle illegal mining. It has since recovered to 30.7 mn mt in FY 2016-177.

Though, on aggregate level, domestic supply versus demand shows a normal scenario, with domestic iron ore inventory hovering above ~100 mn mt for the past five years, the situation is not the same for all miners due to different rules and regulations, type of steel plants, consumer location, and industry dynamics in each state.


India has about 22.5 billion metric tonnes (bn mt) of hematite and 10.8 bn mt of magnetite reserves, of which 5,475 mn mt (mostly hematite) have been identified/explored. 713 iron ore mining leases were granted for an area of 90,301.95 hectares at the end of FY 2015-167. The domestic iron ore production is anticipated to have touched 210 mn mt in FY 2017-18 against 192 mn mt in FY 2016-17 and 155.9 mn mt in FY 2015-163, 7.

Mines can be segregated by ownership as public or private, by the consumption pattern as captive or non-captive, and by iron ore quality (Fe content) as A, B and C category mines. The ratio of production of iron ore lumps to iron ore fines is ~1:2. Mines in Odisha and Chhattisgarh generally produce higher grade iron ores with ≥60% Fe content, but are plagued by inventory pile-up issues due to insufficient evacuation logistics. Mines on the western side - Goa and Karnataka - are of lower grade, with majority having 55-60% Fe content, and suffer from excessive regulatory influence.

State-wise break-up of production (192 mn mt) for FY 2016-17 is: Odisha – 99.6 mn mt, Chhattisgarh – 31.1 mn mt, Karnataka – 26.4 mn mt, Jharkhand – 21.3 mn mt, Goa – 8.9 mn mt and others – 4.6 mn mt.7 However, with the Supreme Court’s recent order cancelling all 88 mining leases in Goa since Q1 FY 2018-19, there would be no near-term supply from the state. It would take time to recover since fresh auctions with fresh environmental clearances have been mandated. Meanwhile, in Karnataka, the mining cap has been recently raised to 35 mn mt for A and B category mines post the mining bans. Further, Karnataka miners are only allowed to sell through the state’s e-auction mechanism and have approached the government and the Supreme Court to allow them to freely export their produce and clear inventories. National Mineral Development Corporation (NMDC), the major producer company, has suspended mining at its Donimalai mines (producing ~7 mn mt pa) in November 2018, following the state government’s decision to impose an 80% premium on iron ore sales from the mine24. Domestic iron ore production in FY 2018-19 is, thus, likely to be lower.

Imports constitute a relatively small component of supply. Imports stood at ~7mn mt in FY 2015-16 and ~4.6 mn mt in FY 2016-177. Domestic inventory of iron ore is another concern for the industry with ~149 mn mt remaining in stockpiles at the end of FY 2016-177.

The global oversupply situation is expected to mend as global demand for steel improves, though iron ore grade-based price differentials are expected to prevail.

Acuité expects that the decline in output from Goa may not be fully replaced by new mines in other states in the near future, due to regulatory impediments and logistical constraints. Demand scenario is currently favourable, but not fully serviceable due to limited supply of higher grade iron ore, pricing disputes between steel mills and mine owners, uncompetitive exports and easy availability of substitute (steel scrap).

Nature & Extent of Competition


Competition in this industry is at three levels: intra-state, inter-state and global. The quantity and quality of ore, production cost controls and logistical cost advantages are the key factors affecting competition.

Odisha alone produces more than half of the country’s iron ore, and the top five producer states together account for more than 95% of the domestic iron ore production. Inter-state competition dynamics in this industry are very pronounced due to the differences in state-wide rules and pricing/sale mechanisms. The intra-state competitive intensity is relatively moderate as large steel producers such as Tata Steel, SAIL, and JSW have a large part of their requirement met from captive iron ore mines and have the ability to absorb additional logistics cost of imports or non-state mines. Smaller steel plants and sponge iron producers, however, do not have much bargaining power. The top five mines account for 26% of the country’s annual production: Jajang (Keonjhar, Odisha, Rungta Mines), Balda block (Keonjhar, Odisha, Serajjudin & Co), Bailadila deposit no. 14 and 5 (Dantewada, Chhattisgarh, NMDC) and Joda East (Keonjhar, Odisha, Tata Steel).

NMDC is the single largest non-captive iron ore producing company domestically, with a 25% market share25. In response to the threat of backward integration by steel makers, NMDC is setting up value-addition projects including a steel plant at Nagarnar, Jharkhand. 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 the largest merchant iron ore miner in Chhattisgarh. NMDC, Kudremukh Iron Ore, Vedanta and BMM Ispat are some of the largest players in Karnataka.

100% foreign direct investment is allowed in the mining and exploration of metal and non-metal ores under the automatic route22. Iron ore mining leases are granted for 20 years and are renewable by state governments with necessary amendments.

Iron ore being a globally traded commodity, commands a fairly uniform grade-based price. Therefore, production cost control and export competitiveness of domestic players vis-à-vis the big four and other global players, determine operational margins. The quality of ore in terms of higher iron and lower alumina content, is all the more important as China, the largest importer, looks to curb pollution, reduce steel production inefficiencies and conserve resources such as coking coal. Price differentials between ore containing 62% and 58% Fe, which widened significantly in the recent past, may narrow marginally going ahead, but grade-based price differentials are expected to be the new normal rather than anomalies.

The industry faces threat from its direct substitute, which is, steel scrap. The charge mix of EAF/IFs can be easily altered to accommodate different proportions of steel scrap depending on the availability and cost factors.

Acuité believes that the competitive intensity in the iron ore mining industry will continue to remain low as it is a capital-intensive business with stiff regulatory barriers, and there are limited numbers of large merchant players who can compete on operational scale efficiencies.

Input Related Risk


The mining of iron ore involves excavating sedimentary rocks by drilling and blasting, extracting metallic iron containing ore and moving non-ore rocks or unwanted minerals (tailings) into waste dumps. The extracted ore is further beneficiated if necessary and finally graded based on the iron content1, 2.

In India, long-duration (usually 20 years) mining leases are auctioned, which allows a specific maximum quantity to be mined from the specified lease area. The main constraint is the distance of iron ore mines relative to the market, and the cost of rail infrastructure and energy cost to get it to the market.

Mining iron ore is a high-volume, low-margin business, as the value of iron is significantly lower than base metals. Generating readily saleable by-products, improving recovery and throughput, reducing unit cost, improving profit margins and tailings management are the key tasks to focus on. Mining is highly capital intensive and requires significant investment in infrastructure to transport the ore from the mine to a freight ship. For these reasons, iron ore production is concentrated in the hands of a few major players1.

Several global companies have invested heavily in automation that promises higher productivity, safer operations and lower costs of mining in the long run. In India, however, the pace of automation technology implementation has been slow, and companies are reluctant to invest in technology, given the regulatory environment uncertainties. Some players have installed GPS trackers and other technology on trucks, which has helped reduce time lags, improve logistics planning and reduce corruption as the quantity mined can be assessed automatically whenever these trucks pass over weighbridges.

Mining lease: 713 iron ore mining leases were granted for an area of 90,301.95 hectares in the country at the end of FY 2015-167. Mining operations can commence only after the allocation of auctioned leases to a specific bidder. While the leases are granted for a relatively long term of 20 years with the provision for renewal, there is uncertainty of regulatory actions that could render lease cancelled for concerns over malpractices or excessive environmental damage. A recent Supreme Court order has cancelled all 88 mining leases in Goa effective April 2018 and mandated fresh auctions to be held.

Labour: Iron ore mining requires semi-skilled labour and competes with other industries including construction for this resource. Around 42,000 persons are directly employed per day in this industry, which constitutes ~38% of persons employed directly in the overall mineral industry7. Though the situation is currently comfortable, any cost inflation can impact margins.

Beneficiation costs: Lower grade ores may require further refining known as beneficiation. It involves further crushing and washing of ores to remove sand and clay, after which iron is separated from sand and clay using magnetic separation. Some miners integrate further to pelletising (converting iron into pellets) or sintering (heating iron ores into a semi-molten mass)18.

Energy costs: Mining is a relatively less energy intensive industry. Energy costs account for only 10-11% of production cost of the Indian mining industry19. This includes fuel consumed by dump trucks, excavators and other mining equipment.

Logistics: Logistics cost (see annex table) accounts for nearly 50% of the cost/pricing structure of the industry. Ores are primarily transported by rail to ports or directly to large domestic steel mills. Often mines are connected by dedicated lines to the existing network. Lack of connectivity and evacuation infrastructure in central India has led to inventory pile-ups at the mines in the region.

Acuité believes that the input-related risk in the iron ore mining industry is relatively moderate. While the labour risk is low, logistical constraints pose a risk to industry in terms of leading to inventory build-up.

Regulatory Risk


Indian government has introduced a number of regulations (included in Act of Parliament in 1987) to maintain the sustainability of mining. According to the Act of Parliament, mining companies have to obtain the lease for 20 years in maximum from the Indian government, otherwise, their mining behaviours are not allowed. 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, by identifying and notifying mineral blocks, undertaking valuation, setting reserve prices, issuing notices inviting tenders, bid submissions, discovering floor prices after the first round of auctions, conducting subsequent rounds of auctions as required, declaring the winning bidder based on the final price offered, issuing letter of intent, mine plan approval, environment and forest clearances, signing mining development and production agreement and deed execution, among others. Mining leases are renewable after expiry, with the provision to amend the terms of the agreement.

The overall framework of environmental legislation in India is set by the National Conservation Strategy and Policy Statement on Environment and Development, issued by the Ministry of Environment and Forests.

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.

The Indian Bureau of Mines, a Government of India body, is engaged in promotion of systematic and sustainable development of mineral resources of the country through regulatory inspections of mines, approval of mining plans and environment management plans to ensure minimal adverse impact on environment. The Indian Bureau of Mines’ sustainability framework and audit/inspection ensure sustainability of mining companies’ operations. It studies and assesses the impact of mining operations on surrounding air, water, soil, sediments and noise quality and compares data to established benchmarks. It also suggests corrective actions to be undertaken at regional levels as well as at individual company levels.

As an example, Goa, which had been primarily an iron ore export-oriented state, had a mining cap of 20 mn mt after the lifting of a mining ban in 2014. The state had to once again face mining activity suspension with a recent Supreme Court order cancelling renewal of all 88 mining leases since April 2018 as several violations were reported where miners continued mining even after their leases expired, some were mining outside the permissive mining area, some failed to maintain the required distance between the overburden and irrigation canals, among others. The Supreme Court has ordered fresh mining lease auctions in the state with fresh environmental clearances, which could easily take a couple of years. Karnataka’s mining cap has been recently raised to 35 mn mt for A and B category mines post the mining bans. However, Karnataka miners are only allowed to sell through the state’s e-auction mechanism. They have approached the government and the Supreme Court to allow them to freely export their produce and clear inventories.

India plans handing over the control of iron ore and coking coal mining to the steel ministry to boost supplies of key steelmaking raw materials as the country is poised to become the world’s second-largest steel producer. The steel ministry has been trying to formulate a policy on iron ore pricing for more than a year as it seeks to protect the industry from volatility. The plan to shift control of the sectors would enable the ministry to finalise its plan sooner23.

Royalty is paid to the government (owner of mineral) for the privilege granted for extraction and processing of minerals. The methodology for calculation of royalty on iron ore and many other mineral commodities was shifted from absolute value per tonne basis to percentage of average sales price per tonne basis. The royalty rate on iron ore accordingly changed from Rs. 8–27 per tonne, prevailing since 2004, to 10% of average sales price on ad valorem basis from August 2009, which was increased to 15% of average sales price on ad valorem basis from September 2014, as per the gazette notifications published by the Government of India from time to time. Royalty rates can be changed by the government once in three years.

Currently, export of iron ore with up to 64% Fe content is freely allowed. Export of iron ore with Fe content above 64% is channelised through Metals and Minerals Trading Corporation of India or against licences issued by the Directorate General of Foreign Trade. High-grade iron ore (above 64% Fe) from Bailadila in Chhattisgarh is allowed to be exported with restrictions on quantity, imposed primarily to meet domestic demand on priority14.

Export of higher grade iron ore attracts export duty of 30%. This together with logistical constraints has aggravated inventory pile-up at mines. Inventory stood at ~149 mn mt at the end of FY 2016-177.

Global regulatory changes also affect the industry as iron ore is a commodity. China being the world’s largest iron ore importer, significantly influences global trade and price of the commodity. A recent Beijing directive to steel mills to modernise or shut down in order to clean up the country’s air led to greater demand for higher grade ore that produce lower emissions when processed into steel. It also led to widening of price differentials between ores with 64% and 58% Fe. The discount for lower grade iron ore widened to 40% below the benchmark from 30% at the start of 20178. These grade-based price differentials are becoming a permanent fixture rather than a blip in the cycle with the demand trend change in China.

Acuité believes that there is a very stringent regulatory watch on the sector, and the constant regulatory curb is crippling the domestic iron ore mining industry. The need to prioritise and support the domestic steel production industry is important, but the economic viability and sustainability of its supplier industry also needs consideration.

Technology Risk


Globally, rising capabilities and falling costs of robotics technology are pushing mining companies to reimagine the dirty, dangerous business of getting resources out of the ground. Global companies are well placed to expand automation rapidly because they have already invested in centralised control systems that use software to co-ordinate and monitor their equipment10. In contrast, domestic companies’ investment in automation is relatively subdued as the business environment is heavily influenced by policy uncertainties. The other reason for maintaining status quo is easy availability of relatively cheaper labour.

Automation provides a significant safety advantage by reducing the number of employees exposed to potential hazards and fatigue levels, as well as limiting exposure to dust, noise and vibration. It also improves mining productivity, provides long-term operational stability and tighter control over costs – all of them critical for the long-term survival and sustainability of businesses.

These advantages have pushed global companies to invest in and implement automation at a rapid pace. Some examples of such efforts are the AutoHaul® project of Rio Tinto in Pilbara region of Western Australia aiming for an ‘intelligent’ iron ore mine, fully incorporating technologies such as robotics and driverless trains and trucks at a single mining site. It recently ran its first autonomous iron ore train over a distance of almost 100 km11, and the company already runs much of its mining, transport and port logistics from an operations centre 1,500 km away in Perth8. Another example is the Carajas mine in Brazil, the world’s largest mine with 7.2 bn mt of reserves, where a complete truckless transport operation system and other automation systems have been installed by ABB to reduce emissions and fuel costs9.

In India, an airborne geophysical survey of the Obvious Geological Potential Area was inaugurated in April 2017 and will cover 0.2 mn sq km area in the next few years. It is one of most efficient and cost-effective methods of resource exploration worldwide.

NMDC is operating three highly mechanised iron ore mine complexes: two in Bailadila, Chhattisgarh, and one at Donimalai, Karnataka. It has also established a well-equipped centre for geo-statistics. Several Indian miners have transportation trucks fitted with GPS and other technologies that have helped reduce time lags, improve logistics planning and reduce corruption as the quantity mined can be assessed automatically whenever these trucks pass over weighbridges.

Acuité believes that Indian iron ore players would continue to remain competitive in the short term with manual operations as labour costs and availability are not a big concern, but in the long term, to remain globally competitive, they would need to invest in automation as and when there is policy support and stability.

Operating Margin


In terms of net sales, the Iron Ore industry witnessed a robust Y-o-Y increase of 17.9% during FY16-FY18. NMDC’s average EBITDA margins for the last three years is reported at 59.6%, whereas the average margin for industry has been at 17% for FY 2016-18. Industry also witnessed growth in the operating margins from 12.6% in FY 2015-16 to 20.4% in FY 2017-18, reflecting a highly favourable position. Key drivers included robust sales growth and efficient cost management.

Interest Coverage


Despite the overall interest expense increased during FY 16-18, improved profitability resulted in an improved average interest coverage ratio at 1.9 times during FY 2017-18 compared to 0.6 times in FY 2015-16. However, average industry interest coverage ratio was reported as Neutral at 1.3 times during FY 16-18.

Return on Capital Employed


Industry ROCE remained highly unfavourable during the period FY 16-18 as the average ROCE for the three-year period was less than 1%. However, improving PAT margins signifies a healthy recovery of the industry as the industry ROCE was reported at 3% in FY 2017-18, 2% in FY 2016-17, and -2% in FY 2015-16.

Debt / Equity


The industry showed a stable and highly favourable debt-equity ratio with an average of 0.7 times, during the three-year period. Debt-Equity ratio has improved in FY 2017-18 and was reported at 0.63 times compared to 0.69 times in FY 2016-17.

GCA Days


Though gross current assets (GCA) remained favourable during FY 16-18, the industry presented an improving trend in terms of GCA decreasing from 117 days in FY2015-16 to 111 days in FY2016-18. The industry had an average GCA of 114 days, during the three-year period.


IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable



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