Maoists-Hit Steelmaker to Reopen Iron Ore Mine: Corporate India

Steel Authority of India Ltd., which is struggling with a $13.2 billion expansion plan in the face of Maoist rebel attacks and government red tape, will reopen an iron ore mine key to capping costs.

India’s second-largest steelmaker will resume work at the Gua mine in eastern Jharkhand state this week after authorities renewed an environmental permit four years after expiry, A.K. Singh, spokesman for the raw materials division, said in a phone interview. The mine will initially supply a new $3 billion plant being set up in neighboring West Bengal and help boost the state-run company’s output by 60 percent.

New Delhi-based Steel Authority, whose competitive edge lies in having its own mines, has been beset by delays in forestry clearances and land acquisitions, and threats from Maoists who have sworn to “chop off a head for every tree” should jungle cover be removed to start new mines in their hideouts. The hurdles faced by Indian steelmakers have come amid slowing economic growth and mining bans that have led to shortages of raw materials.

“Iron ore security has been the saving grace for Steel Authority (SAIL),” said Abhisar Jain, an analyst with Centrum Broking Ltd. in Mumbai, who recommends investors sell their shares. “High wage costs, slowing infrastructure orders and importing coking coal with a weakened rupee are pressuring margins.”

Wages, Rupee

A 6.2 percent decline in the local currency against the dollar in the past year has made shipments from abroad more expensive, while Steel Authority spent 12 percent more on wages in the quarter to Dec. 31 than a year earlier. Earnings margin before interest, taxes, depreciation and amortization narrowed to 13.1 percent for the 12 months ended March 31, 2012, the least in at least seven years.

Steel Authority gained 0.7 percent to 60.85 rupees in Mumbai yesterday. The shares have declined 33 percent this year, compared with a 5.2 percent drop in the key S&P BSE Sensex. (SENSEX) Tata Steel Ltd. (TATA), India’s biggest maker of the alloy, has fallen 29 percent since January.

Steel Authority plans to increase its crude steel capacity to 21.5 million metric tons a year, spending about 721 billion rupees ($13.2 billion), according to its website, which doesn’t mention a timeline. The investment will include improving the product mix, upgrading machinery and expanding output at its iron ore and coking coal mines.

Quadrupling Capacity

The company expects to increase annual iron ore output to 39 million tons from 22 million tons to feed its enlarged operations. Coking coal production is expected to quadruple to 4.3 million tons, according to the website.

Gua’s capacity will rise fourfold to 10 million tons in three years, allowing the mines to also feed Steel Authority’s expansion in Durgapur in West Bengal and Bokaro in Jharkhand. A plan to develop its biggest iron ore mine in the central state of Madhya Pradesh has stalled because the company failed to remove forest cover that would have allowed mining in a 5,016 acre area.

Assured iron ore supplies have provided a buffer to Steel Authority’s cost of coking coal, another key raw material, almost all of which the company has to buy locally or overseas. The steelmaker consumes 12.6 million tons of coking coal annually, 70 percent of which is imported.

Ore Cost

Steel Authority spends about $25 to produce a ton of iron ore from its mines, half the cost it would incur on buying the lowest grade from NMDC Ltd. (NMDC) Benchmark coking coal prices for the three months ending June 30 settled at $172 a ton, an increase of 4.3 percent from the previous quarter.

Owning iron ore and coking coal mines in India has helped Tata Steel’s local operations counter a demand slump in Europe, where about 75 percent of its capacity is located and the entire raw material requirement has to be bought. The company is expanding in India, where all the iron ore needs and about half the coking coal requirement are met from its mines.

Mining curbs in Karnataka and Odisha to protect the environment have led to shortages of iron ore, eroding output at mills. JSW Steel Ltd. (JSTL), the nation’s third-biggest producer, had to cut output by 70 percent in 2011 after the Supreme Court banned mining in the southern state, where its biggest plant is located. Plant use improved to 80 percent after the court partially lifted the ban and allowed state-controlled NMDC, India’s biggest miner of the commodity, to auction stockpiles.

Project Delays

Delays in construction of infrastructure projects, including power plants, have crimped India’s steel demand, which grew at the slowest pace in four years. The nation’s $1.8 trillion economy probably expanded 5 percent in the year ended March 31, the least in a decade, according to government estimates.

Steel use in the year ended March 31 is estimated to have risen 3.3 percent to 73.3 million tons from a year earlier, according to initial data on the steel ministry’s joint plant committee website. Production rose 2.5 percent to 77.58 million tons.

The mining curbs on iron ore have also led to idling of equipment and a drop in the demand for transport vehicles. Truck and bus sales last month dropped 6 percent, while demand for cars fell 23 percent, the New Delhi-based Society of Indian Automobile Manufacturers said yesterday.

“There’s substantial idling of machinery equipment, which is causing a severe strain on prices of mining services,” Subhas Pramanik, managing director at Gulf Oil Corp., said in an interview on April 5. The mining services unit of the company, which sells automobile lubricants, contributes about 12 percent to its revenue.

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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