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Steel Authority Said to Close Odisha Mine, Cutting Output

India's Finance Minister Palaniappan Chidambaram
Palaniappan Chidambaram, India's finance minister, plans to raise at least 300 billion rupees from the sale of state-owned shares in companies including Steel Authority to bolster strained finances. Photographer: Pankaj Nangia/Bloomberg

Steel Authority of India Ltd., the country’s second-biggest maker of the alloy, will stop work at an iron ore mine in the eastern state of Odisha to make way for an elephant corridor, two people familiar with the matter said.

The environment ministry won’t renew the state-owned company’s permit after a two-year extension expires on Nov. 10, the people said yesterday, asking not to be identified as they aren’t authorized to speak to the media. Odisha, where a government panel is currently reviewing illegal mining and environmental damages, plans to set up a passage way for the pachyderms near Steel Authority’s mine, the people said.

The stoppage at the Bolani mine will cut the New Delhi-based company’s iron ore output by almost 20 percent and impair 2.8 million tons of steelmaking capacity. Buying the raw material from the market may raise costs by $70 a ton, said Ravindra Deshpande, an analyst at Elara Securities Ltd., further eroding profit that has declined in eight of the past nine quarters.

“Captive iron ore is Steel Authority’s biggest advantage and the closure is certainly a big hit to profitability,” Mumbai-based Deshpande said in an interview yesterday.

At an average price of 35,000 rupees ($643) per ton of steel, the shutdown may result in an average revenue loss of 98 billion rupees, imperiling the company’s expansion. New Delhi-based Steel Authority plans to spend $13 billion to boost steelmaking capacity by 60 percent to 21.4 million tons annually, improve products and develop mines.

Maoist Rebels

Steel Authority will attempt to make up for the closure by raising output at other mines and by using low-grade ore, the people said. Steel Authority’s spokeswoman Arti Luniya didn’t answer two calls to her office.

The company, which has the capacity to extract about 25 million tons of iron ore at its mines, is already struggling to tap a reserve in the central state of Chhattisgarh in the face of attacks by Maoist rebels.

New Delhi-based Steel Authority’s shares rose 1.3 percent to 83.50 rupees at the close in Mumbai. The stock has climbed 2.5 percent this year, compared with a 22 percent gain in the benchmark BSE Ltd. Sensitive Index and a 20 percent advance in the shares of the nation’s No. 1 Tata Steel Ltd.

Of the 50 analysts that track Steel Authority shares, 17 recommend buying them, while 19 advise selling, according to data compiled by Bloomberg. The rest have a hold rating.

Illegal Mining

India’s federal government is cracking down on illegal mining and has set up a panel to probe extraction in seven mineral-rich states including Goa, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha and Karnataka.

“A comprehensive audit of mining across the country is necessary to assess the impact on environment, lives and also the extent of illegality,” former Mines Secretary Vishwapati Trivedi said in September.

Getting environment and forest clearances for projects can take as long as seven to eight years, according to N.C. Jha, head of mining at Monnet Ispat & Energy Ltd. and former chairman of Coal India Ltd. The environment ministry has stepped up vigilance in recent years, with violations leading to restrictions and bans by the Supreme Court and local administrations.

India had 27,694 elephants as of 2008, according to data on the website of the Ministry of Environment and Forests. In Odisha, almost 5,000 hectares (12,355 acres) of prime elephant habitat is encroached by mines, erasing corridors used by the animals for thousands of years, according to the website of the Wildlife Protection Society of India.

‘Irreversible Change’

“Elephants don’t need a very large area to move, but they need forest cover for a sense of security,” said Dipankar Ghose, New Delhi-based director of species and landscapes program at WWF-India. “The associated development around the corridor makes them insecure and makes them react violently to the environment. If an animal species is exterminated from a place, it’s an irreversible change.”

The federal government, the main shareholder of Steel Authority, will do everything to resolve the issue as it needs to raise money by selling a stake to narrow its budget deficit, said Niraj Shah, an analyst at Fortune Equity Brokers India Ltd. in Mumbai.

“There’s a lot at stake here,” he said. “It’s not just about SAIL’s profitability, but it can also affect the government’s disinvestment plan.”

Rating Threat

Finance Minister Palaniappan Chidambaram plans to raise at least 300 billion rupees from the sale of state-owned shares in companies including Steel Authority to bolster strained finances after Standard & Poor’s and Fitch Ratings earlier this year cut the credit outlook for local sovereign debt to negative, a step away from lowering the rating to junk status.

Steel Authority’s profitability is derived from its own sources of iron ore for its entire need, though it depends on imports of coking coal to meet 70 percent of its requirements, making it the second-biggest spender on raw material among the three biggest steelmakers in the country.

The company’s cost of turning iron ore into a ton of steel was 16,464 rupees in the year ended March 31, more than double that of JSW Steel Ltd.’s 8,105 rupees, according to Fortune’s Shah. Tata Steel incurred 21,703 rupees.

A shutdown of the mine may help smaller makers of the alloy to gain market share. NMDC Ltd., India’s largest iron ore producer, may increase prices more frequently if more mines across the country are closed, Shah said.

In addition to higher costs of procuring ore, steel prices that have remained little changed locally will also hurt Steel Authority, Elara’s Deshpande said.

Producers in India have been holding prices, waiting for the festive season to boost demand. Steel Authority kept prices unchanged this month, Chairman C.S. Verma said on Nov. 1, adding the company will review prices in a week. The slowing pace of construction and high interest rates are not allowing prices to rise, he said.

Sourcing ore externally “isn’t a good choice when steel prices are weak,” Deshpande said.

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