India Plans Overhaul Of Iron Ore Auctions To Boost Output, Counter Cheap Steel Imports

(MENAFN- Live Mint)

New Delhi: With domestic steel demand projected to surge, India is preparing a sweeping overhaul of its iron ore mine auctions framework to boost production and deter cheap steel imports from countries such as China, Japan, South Korea and Vietnam, according to government officials and industry executives aware of the matter.

The Centre plans to make upfront payment the primary metric for mine allocation in auctions along with a premium that will be capped at 50%, the people cited above said on the condition of anonymity. So, a company that bids with the highest upfront payment offer plus the best premium offering gets the mine. If more than one company quotes, say, a premium of 40%, then upfront payment decides the winning bidder.

That is different from the current system of auctions based on the Mines and Minerals (Development and Regulation) Amendment Act, 2015 (MMDR 2015), where bids are awarded solely on the basis of the highest premium that companies quote in the auctions. The premium is calculated in percentage terms over a monthly base price fixed by the Indian Bureau of Mines.

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To be sure, an upfront payment is also made by a successful bidder-but as a fixed percentage of value of estimated resources or VER for the lease area-as a performance guarantee, and not as a variable component that can give bidders a competitive edge in auctions.

“Since MMDR 2015, average auction premiums have crossed 100%, making mining operations uneconomical. Several mines remain non-operational under these conditions," said Dhruv Goel, chief executive officer of Big Mint, a market intelligence firm.“This measure could restore economic viability and encourage more mines to start production."

Since 2015, about 135 iron ore mines have been auctioned, but only around 35 are operational, according to data from Big Mint.

“The government feels that a lot of companies are just bidding in the auction to corner the resources with them and they are not starting purposely," one of the industry executives cited above said.“Now if somebody pays an upfront fee, there is an incentive or interest for the company to start the mine as soon as possible."

Alongside, the Centre is also weighing a uniform export duty on all ore grades, including low grade fines, while enforcing minimum dispatch norms on non-auction mines, and linking domestic prices more closely with global benchmarks.

“India exports nearly 30-35 million tonnes of low-grade iron ore, which is currently exempt from duty. A uniform export duty structure could help channel some part of these volumes back into the domestic market," said Goel.

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To be sure, India had imposed a 30% export duty on iron ore having 58% or more iron content. No duty is applicable now in low grade ore having lower than 58% iron content.

These measures are expected to be implemented after the monsoon season in October, according to a government official from the mines ministry who spoke on condition of anonymity. They would apply to mining leases that are terminated due to non performance, and to new leases in areas that states have been asked to identify.

Emails sent to the ministries of mines, commerce and industry, and steel did not elicit a response till press time.

Industry veterans like Jindal Steel chairman Naveen Jindal and ArcelorMittal Nippon Steel India's Dilip Oommen have been vocal about the need to reduce input costs, Mint reported on September 8.

“If enough (iron ore) mines are brought out, there's a calendar for auctions, then, automatically, it will put the steelmakers at ease," Jindal, who is also the president of the Indian Steel Association, said on Monday, adding that it will reassure them that there is enough for everyone.

Since the mines are auctioned one by one, Jindal said steelmakers who have set up steel plants are compelled to bid higher premiums to ensure raw material security.“But I hope in the times to come, if enough mines are brought out, then these premiums will also go down," he said.

How things transpired

According to the executive cited earlier, the government held a follow-up meeting on iron ore reforms on 4 September with an advisory committee comprising steel and mining industry players. A first round was chaired by Union commerce and industry minister Piyush Goyal on 26 August.

Reforms were discussed with an aim to boost domestic ore supplies, with demand projected to rise from the current 255 million tonnes (mt) per annum in line with India's growing steel production.

The meeting also discussed bringing non-auctioned mines under a minimum dispatch agreement (MDPA), requiring dispatch of at least 80% of environmental clearance (EC) capacity annually. Indian miners hold ECs for 470 mnt of iron ore but produce only about 290 mnt.

Non auctioned mines were given to steel companies earlier as captive mines for use in their steel making facilities. Also, prior to auction becoming the only option to allocate mines in 2015, mining rights were offered by a group of officials to applicants presenting the best mining plan for a particular identified block.

The government may take a decision on non-auction mines, where extraction of ore remains slow despite several of these mines being allocated almost two decades ago. The idea is to increase the production of iron ore so that India can meet its target of achieving 300 million tonnes without becoming an importer of the raw material.

The entire exercise is to make the process of auction more attractive for investors as well as boost the availability of the raw material in the market by bringing the non-auction mines under production.

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On trade policy, the government is considering a uniform export duty across iron ore grades, although pellets may remain exempt. India exported around 38 million tonnes (mt) in 2024 (30 mt fines/lumps and 8 mt pellets), with the current duty at 30% for >58% Fe ore, while pellets carry no duty.

How bid premiums work

The bid premium is a percentage of the iron ore price that is set by the Indian Bureau of Mines each month for different states and grades of ore. The premium that a winning bidder offers will be payable to the government as tax.

So if a company's winning bid is 150%, it means that the company will pay 150% of the monthly value of the Indian Bureau of Mines price of iron ore to the state government for every tonne of iron ore it produces.

Additionally, the Indian Bureau of Mines has been tasked to consolidate stakeholder views on linking domestic ore prices with global benchmarks and submit its final report by the end of September.

These discussions come as the government tries to reduce input costs that will make Indian steel prices competitive with global peers and help domestic steelmakers tackle the issue of cheap steel imports from countries like China, Japan, South Korea and Vietnam.

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