How is Karnataka's iron ore, pellet market performing post Supreme Court order?

• State govt issues interim guidelines on material transportation
  
  
• Iron ore shortage propelling pellet prices in state
  
  
• Iron ore sales likely to pick up, weak steel prospects weigh
  
  

In a much-awaited move, the Karnataka government has issued interim guidelines related to the evacuation and transportation of iron ore from category A and B mines as well as auctioned C category leases "by not limiting to the closing balance" available on 31 March, 2022. Total iron ore inventory, comprising both old and fresh stocks, are pegged at around 12 million tonne (mnt), as per the Supreme Court-appointed Monitoring Committee.

The existing leaseholders can now evacuate and transport the material for sale that was mined both before the apex court order on 20 May and material excavated subsequently.

The Supreme Court on 20 May lifted curbs on exports of iron ore from Karnataka and eased all restrictions on sales from the districts of Bellary, Chitradurga and Tumkur where mining activity had been prohibited following rampant environmental transgressions in 2011.

The CEC had categorised 166 mining leases into A, B and C as per the extent of illegalities committed by them. Category A comprised 45 mines that had negligible or no illegalities. Under category B were 72 mines where pits were found outside the lease area and 49 category C mines were operations had stretched beyond the lease boundary by more than 15%.

Karnataka was the second-largest iron ore producing state in India with over 40 mnt of production recorded in FY'22.

Setting aside its 2011 order of direct disposal of the accumulated iron ore through the process of e-auction conducted by the Central Enforcing Agency (CEC)-appointed Monitoring Committee, the apex court ruled that direct contract sales and/or spot sales would henceforth replace e-auction.

However, despite the court order, and prior to the issuance of the interim guidelines by the state government, market participants were unsure of the modalities of iron ore evacuation and dispatch, which resulted in a deadlock situation where the mineral for which confirmed orders had been received and advance payments made was not allowed to be lifted for want of requisite permission from the state government.

Interim guidelines

The state government has declared that transport permits will only be allowed for registered end-users and not traders and the lessees will have to communicate the geo-coordinates of the concerned stocks to be dispatched, lot sizes, Fe grade, etc. to the Department of Mines & Geology (DMG) for prior inspection.

The lessees should undertake to pay the difference of royalty, DMF, NMET and the special purpose vehicle (SPV) charge - at 10% of the IBM declared average sale price (ASP) - to the reconciled grade, to be considered whichever is higher between DMG and the lessees.

The auctioned C category mines, however, will pay 25% of the auction premium or sales proceeds from auctions into the account of the SPV, as per the Supreme Court's 2015 order. Abiding by the reconciled royalty and other statutory charges is mandatory for securing permits.

Only in case of NMDC's Donimalai mine, the leaseholder will submit to the DMG the indicative grade of the ore for securing dispatch permit as previously followed in the case of advance e-auction.

For exports of iron ore, the exporters have to register with the DMG first by paying a sum of INR 10,000 and subsequently produce permission letter from concerned port authorities for storage of material at ports, transportation therefrom and details of the export destinations.

Karnataka miners, the guidelines say, can now both sell iron ore through direct contracts/spot sales as well as e-commerce platforms such as MSTC. Further guidelines on disposal of old stocks mined prior to 2011 and stocks at expired leases and cancelled stockyards will be issued shortly.

Contract sales replace e-auction

Significant decline in iron ore sales in Karnataka was the immediate fallout of the SC order due to the widespread confusion among market participants about the new rules governing evacuation and transport of iron ore.

A meeting was held between CEC with Karnataka government representatives, Monitoring Committee, FIMI, KISMA, JSW Steel, NMDC and Vedanta on 22 June to discuss the difficulties in implementation of the SC order.

The meeting concluded that the order removes the restrictions placed on the manner of conducting the sale of iron ore and fixing of sale price and grants permission to sell the already excavated iron ore stockpiled at various mines and stockyards without resorting to the process of e-auction.

The order also grants permission to miners to enter into direct contracts to lift the excavated iron ore and export iron ore and pellets produced in Karnataka. The SC has recorded various reasons to indicate that the e-auctions were no longer required and a "level playing field" for all players in the country was necessary.

Note: Data updated till data compiled till 24 Jun'22

Current scenario

Karnataka miners were awaiting clarity on the modality of the transition from auctions to direct sales and volumes of iron ore offered in the auctions in June fell sharply as a result.
SteelMint data show that Karnataka iron ore e-auction sales volumes decreased by 35% on month in May. The total allotted quantity during the month was 1.25 mnt compared to 1.91 mnt in April.

SteelMint further reported that Vedanta, NMDC and KSMCL conducted auctions via MSTC post the SC order, while a few private miners had commenced direct sales. However, volumes remained low as well as buying interest in auctions - partly due to the prevailing gloomy steel outlook and, in some measure, due to the relatively lower grades being offered.

Amidst iron ore shortage, pellet prices in Bellary remain supported compared to other regions in central and eastern India. Pellet (Fe 63%) prices in Bellary increased to INR 8,750/t exw yesterday as against INR 8,450/t on 21 June. In comparison, prices in Odisha and Chhattisgarh are at INR 7,100/t and INR 7,650/t, both exw.

However, prices are expected to rationalise as the guidelines for iron ore dispatch take effect and supplies normalise in Karnataka. SteelMint expects iron ore sales to gather pace in July. However, persistent weak buying interest in recently held auctions reaffirms the fact that the overall bearish steel market prospects are likely to adversely affect iron ore sales and prices in the coming time.

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