Mineral auctions in India failed to encourage mining investments, exploration: Ex-Steel Secretary

Mineral auctions in India have largely failed to bring in investments to the mining sector and encourage extensive exploration of the country's mineral wealth, Aruna Sharma, 'former' senior Secretary, Ministry of Steel, observed during an exclusive interview with SteelMint recently.

Auctions vs allocations

As many as 11 blocks are under the hammer in the second phase of mineral auctions in Odisha this year after 19 blocks - mostly iron ore but also manganese -were auctioned in 2020. Importantly, bid premiums being quoted by the bidders for the mine blocks on offer this year are hovering at similar high levels.

"Personally, I was never in favour of auctions. India can have a better royalty structure. We are the only country in the world that has chosen the auctions route as a way of distributing natural resources," Sharma opined.

"In other mining geographies, allocation of mines is the norm rather than auctions. Of course, there is a royalty structure as well as other taxes through which the government extracts its own share of the profits," she explained.

"I always felt that adoption of the auctions regime has not resulted in extensive exploration of India's mineral wealth. From the long-term perspective of investments in mining, allocations are a better alternative. But if the government happens to be insisting on auctions, there is no alternative," Sharma told SteelMint.

High premiums

Dwelling on high bid premiums at auctions, the senior bureaucrat observed: "The auctions in 2020 witnessed very high price levels but the paradoxical result has been that the IBM index has started falling. So, how does it help the government?"

"A clash exists between revenue maximisation, on one hand, and sustainable investments in mining, on the other. Investments are required to raise the sector's contribution to GDP and create employment opportunities. However, with auctions, the focus is on revenue maximisation," she added.

High bid premiums seem to be a result of active efforts by end-users to ensure uninterrupted iron ore supply and/or to lessen dependence on the merchant market. However, high premiums have had the paradoxical effect of companies coming forward to surrender mines acquired at auctions.

In Aug'21, JSW Steel wrote to the Odisha government expressing its intent to surrender "the entire area of the Gonua iron ore mining lease under Rule-21 of Mineral Concession Rules (MCR), 2016 with effect from August 12, 2022." The leading steel producer had won the mine for a premium of 132% in the 2020 auctions.

JSW has moved the Orissa High Court against the state government's INR 696.32 crore notice for shortfall in despatches from its Jajang iron ore mine. A year after they were auctioned, many of the mines in Odisha failed to meet their respective MDPA targets and were slapped with notices. JSW Steel, Tata Steel, KN Ram, and Serajuddin & Co. have moved court.

Production takes a hit

Out of the 19 auctioned blocks in Odisha last year, 14 have commenced production in fits and starts through 2020. While three of the blocks have been put up for re-auction this time, two non-operationalised blocks were allocated to Odisha Mining Corporation (OMC).

Companies expressing intent to surrender mines, and recurring shortfall in dispatches from high-yielding mines, are a pointer to the fact that high premiums are discouraging production and dispatches. This is starkly similar with the fate of coal block allocations: many of the blocks never started operations.

The unavoidable consequence has been shortfall in production thereby compounding the problems of end-users, especially smaller steel units who depend entirely on merchant sourcing of iron ore. As per SteelMint data, iron ore production from the auctioned leases in Odisha decreased by 63% on the year in FY'21.