The government move to increase royalty on iron ore will have little impact on the margins of domestic steel makers, but iron ore exporters which pay high export duty on shipments will experience slimmer profit margins, analysts said.
The government August 20 increased royalty rates on several minerals, including iron ore and bauxite, but has not been notified the same yet, neither has it set any specific timeframe for its implementation. This came five years after the last royalty adjustment done in 2009. As per the decision, royalty rates on iron ore will go up from 10 per cent to 15 per cent.
Industry officials say the higher royalty rates are expected to raise input costs of steel firms by $2- $5 per tonne, depending on the type and grade of iron ore used.
Fitch Ratings said domestic iron ore miners that largely supply domestic users would be able to pass on the increase in cost, given the tight supply situation, which would raise input costs for both integrated and non-integrated steel producers.
“Steel producers will be able to pass on their higher costs to consumers because of a likely improvement in steel demand. As a result, the higher royalty is unlikely to have a major bearing on profit margins. We expect steel demand growth to improve from the second half of this financial year, supported by a pick-up in consumption on rising consumer sentiments and an improvement in economic growth,” said Muralidharan R, director of Fitch Ratings.
However, some analysts said while the upward revision in royalty rates would lift the cost for miners by Rs 150 to Rs 250 ($2.50-$4) per tonne, they may not be able to pass it on to the steel makers completely, as it would make imports cheaper.
Iron ore exporters, who already pay high export duties on shipments, will face slimmer profit margins following the royalty increase, Muralidharan said.
Iron ore exports (other than pellets) already attract export duty of 30 per cent. India largely exports lower-grade iron ore fines. While global iron ore prices remain weak, the additional cost will significantly impact the competitiveness of iron ore exports.
Steel demand in India was weak during FY14 with consumption rising by just 0.6 per cent to 73.9 million tonnes, according to data from joint plant committee, the institution which is officially empowered to collect data on iron and steel industry. This slowdown can be attributed to slower growth in key steel-consuming industries like auto, infrastructure, construction and engineering.
But the steel industry is expecting better times ahead, as consumer sentiment improves, as is being reflected in passenger vehicle sales data compiled by the Society of Indian Automobile Manufacturers (Siam). Car volumes rose during June and July from a year earlier, compared with the same months a year ago.
Source:mydigitalfc.com
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