Iron ore production in India is predicted to fall by nearly a quarter in the current financial year, according to reports by Sesa Goa.
The company, which is part of Vedanta Resources and jointly financed Sterlite's $10 billion takeover of Cairn India based this forecast on two points: regulatory constraints and production caps. The company itself claims to have been somewhat of a victim of these hurdles as its profit fell 76% due to lower volumes and weak ore prices.
Sesa Goa was unable to produce iron ore from its mines in the Southern state of Karnataka in the June quarter because of the mining ban in place, thus part-impacting its bottom line. Production was down to 2.8 million tonnes from 3.2 million tonnes a year ago.
Standard Chartered too has said India's iron ore exports will stand at 39 million tonnes in FY13. Last fiscal year, ore exports stood at 55.2 million tonnes.
Meanwhile, a Unctad report has said global iron ore use is expected to increase from 1.92 billion tonnes in 2011 to 2 billion tonnes in 2012, and 2.08 billion tonnes in 2013. Iron ore production and trade had set new records in 2011, the report added.
Among major producers, Australia increased production by 12.7%, Brazil by 5.1%, and China by 2.1%. Production in India declined to an estimated 196.0 million tonnes in 2011, down 7.5%.
So, what ails iron ore production in India? Many sector analysts have been saying Sesa Goa's iron ore production may take an overall dip this fiscal.
R K Sharma, secretary general of the Federation of Indian Mineral Industries said export of iron ore is no longer a viable proposition. "We are not in a position to make any estimation for exports during the current year. Given the prolonged ban on mining in Karnataka, restriction on mining in Odisha and Goa, along with a high railway freight rate and 30% export duty, it just doesn't make sense to export," he said.
The ban on mining in some Indian States like Karnataka, Goa and Odisha is one of the many reasons domestic and international steel manufacturers have been hit, thin profit margins is another.
Take the eastern State Odisha for example. It is the largest producer and second biggest iron ore exporting state of India. It has the Joda, the largest mining circle in India in terms of iron ore production, with more than 40 million tonnes of annual output. Joda accounts for a fourth of India's total output.
As per data available with the Odisha steel and mines department, in the first quarter of the current financial year, traders in Joda mining circle lifted 57% less iron ore for export purposes compared with the year ago.
For 2012-13, the state steel and mines department has capped the iron ore production for Joda mining circle at 40 million tonnes. As a result, a maximum of 400 trucks can be allowed per day to carry material from this circle for export purposes.
Like Odisha, lower margins are also affecting states like Jharkhand. Meanwhile, Karnataka, on the other hand, has yet to resume export operations.
In fact, Chinese steel companies are reportedly worried about the reduction in supplies of iron ore from India. India recently raised export duties from 15% on lumps and 5% on fines to 20% across the board.
India is the 3rd largest exporter to China after Australia and Brazil. Now, with the new tax and the shutdown of mining in Karnataka, many Chinese companies are left without their normal supply of iron ore from India.
Exports aside, even in the case of domestic consumption of iron ore, steel and pig iron companies in Karnataka, who depend on this raw material, are facing closure due to 'severe shortage' of the ore.
Karnataka's state's steel industry accounts for 25% of India's annual production and companies in that State have just about 45 days of supply left. Vinod Nowal, Director and Chief Executive Officer of JSW Steel told mediapersons a few days ago that if mining was not resumed in Karnataka, it would be difficult for them to keep their plant running.
India's Supreme Court had banned iron ore mining in some districts of Karnataka in July last year following allegations of a financial scam. In September, some amount of mining was permitted to tide over the crisis.
The iron ore miner Sesa Goa reported a 14.6% in net profit at $173 million (Rs 9.6 billion) for the first quarter ended June 30, 2012, mainly on its share of profit in associate company, Cairn India. In the previous year, it reported a net profit of $151 million (Rs 8.4 billion).
Net profit of the company would have been down further to $35 million (Rs 1.9 billion) during the reporting quarter, if it had not received $137 million (Rs 7.6 billion) as its share of profit from Cairn India in which Sesa Goa has 20% stake.
Profit declined due to lower volumes, higher export duties, higher interest cost, foreign exchange losses and dip in iron ore prices, which was partly offset by rupee depreciation, the company said.
"During the first quarter, iron ore production and sales were 3.4 million tonnes and 2.9 million tonnes, respectively. The decrease in production and sales volumes was primarily on account of the Karnataka mining ban and continued logistical constraints in Goa," said Sesa Goa's managing director P N Mukherjee.
The company had produced 4.4 million tonnes and sold 4.3 million tonnes of iron ore during the April-June quarter of the last fiscal.
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