Karnataka iron ore mines stuck with 6.5 million tonnes of unsold inventory

Iron ore miners in Karnataka are stuck with 6.5 million tonnes of unsold inventory as against 1.5 mt a year ago. And one of the reasons is that the steel companies are buying ore from other states, while Karnataka mines are not allowed to export outside the state. Unsold ore amounts to more than 20 per cent of the total production of iron ore in the state in FY19. 

The miners are not able to sell the inventory in the state or domestic market since buyers prefer imported iron ore as they feel it is better on quality. This peculiar phenomenon not only has affected the miners, but also led to around Rs 400 crore loss to the state.

The global iron ore market is facing a deficit this year due to the anticipated reduced supply from the world's No. 1 iron ore miner Vale SA, whose operations in Brazil have been curtailed following a fatal tailings dam collapse in January. Adding to concerns about the shortfall, major iron ore producers in Australia have lowered their shipment estimates for this year, after a tropical cyclone in late March hit their operations. 

According to Care Ratings, the global supply disruptions amount to about six per cent of the global iron ore seaborne market.

Miners, mainly from Chattisgarh and Odhisha, are able to utilise this opportunity, while their peers in Karnataka could not, since under the Supreme Court directions, all the iron ore produced by mines in Karnataka is sold through e-auctions to domestic steel companies on tonne-by-tonne basis. While, sellers are not allowed to export iron ore, buyers or the end-users have complete freedom to import iron ore from anywhere in the world or purchase from other states of India.  

This peculiar phenomenon which is applicable only to the state of Karnataka, has resulted in iron ore sales failing to rise above 26.5 million tonnes against total FY19 production of 29.5 million tons in the state of Karnataka. The largest buyer of iron ore in Karnataka reduced its procurement of iron ore from 19Mt in 2017-18 to 13 Mt in 2018-19. "A whopping impact of Rs 400 crore in lower revenues to the state in form of lower sales resulting in lower royalty payment by mines and Rs 2,215 crore for miners from this reduction in local procurement," say miners.

"Due to e-auction, there is a unique restriction on sellers. No material can be sold without e-auction whereas buyers can buy from anywhere. This has resulted in lot of imported material in addition to material from other states getting into Karnataka and has resulted in huge unsold inventory in the state. The unsold inventory has caused a loss of around Rs 400 crore to the state exchequer," says one of the largest miner in the state.

Basant Poddar, former Chairman and member of FIMI South, added the iron ore sales in Karnataka have declined in 2018-19 due to high imports. This is a very strange situation where the local industry is not buying iron ore and exports are not permitted, which would otherwise fetch a higher price translating into higher revenues for the state and to the mining companies. 

If import continues from abroad or from other states in 2019-20, it is nothing but a yet another bleak year for Karnataka mining industry, as it causes huge revenue loss to both state exchequer and miners, says FIMI.

Also, Karnataka Iron Ore mining fraternity is not able to market its ore freely. As restrictions have been placed on exports, mining companies can neither sell to pellet manufacturers like Kudremukh Iron Ore Company Ltd (Pellet manufacturer for export) nor can export the ore. Exports would most definitely help in overall development of the country including foreign exchange as well as ensuring no stock build up. Paradoxically, when imports of iron ore are not restricted and has been happening in an unrestrained manner, the time has come for exports to be permitted as well, said the miners. 

"On the other side, the e-auction process of sale is also not favouring the industry. The miners have to wait for 45-90 days to complete a sale. This is an absolute travesty of commerce. All over the world free trade of minerals exist, but not in Karnataka," said Poddar.

Seshagiri Rao, Joint MD & Group CFO, said that two mains reasons for the high inventory in Karnataka are price and quality. His company, JSW Steel, is the largest procurer of iron ore in Karnataka.

He added, of the 6.5 million tonnes inventory, which is claimed by the industry, 2 MT is with MML, a public sector firm, which is quoting Ra 700-800 higher than NMDC.

Similarly, another big private miner increased the price when NMDC reduced the price and that too for a low grade ore, said Rao.

Net to net the price is costlier by Rs 1,000 a tonne compared to NMDC.

Rao added with NMDC's Donimalai mine is closed it has created a shortage of seven million tonnes, which will be a major concern. He requested the Government to speed up the auction process.

He said, if the situation continues the steel maker don't have a choice but to import, which is costlier currently due to shortage of supply globally.

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