Will the second phase of mineral block auctions boost iron ore production in Odisha?

The second phase of mineral block auctions in Odisha was concluded recently and the participation this time was no less vibrant compared to the first phase of auctions prior to 31 Mar'20.

Odisha had put up 10 iron ore and one bauxite block for auctions. The mineral blocks witnessed participation from 38 mining and steel companies with 123 bids being put up for the iron ore mines.

Out of the 10 iron ore mines auctioned, six were virgin blocks and the rest brownfield mines. Three mines, which had failed to commence production in 2020 (bagged by Fomento, Tarama and Vishal LPG) were re-auctioned this time and Essel Mining's Kasia block was also auctioned.

The auction for the Teherai iron ore and manganese block was annulled since there were less than three technically qualified bidders, while the Orissa High Court put on hold the auction of the Karlapat bauxite block.

Fast-tracking auctions

The government has said that auctions are the sole means for judicious distribution of mineral resources. The Odisha government has declared that more mineral blocks will put under the hammer in the coming days. The Ministry of Mines has handed over 100 G4 mineral block reports of the Geological Survey of India (GSI) to different state governments and is finalising the accreditation process for private exploration entities.

This comes against the backdrop of the National Mineral Policy (NMP) goals to increase mineral production by 200% in seven years. Of India's obvious geological potential area of 0.571 million sq. km, only 10% has been explored. The Centre has called upon the states that received the mining block reports to make the auction process faster.

The MMDR Amendment Act, 2021, gives the Centre the right to auction blocks in case of delays by the concerned state governments. Also, non-functional blocks allotted to PSUs could be auctioned in order to enhance resource availability and efficiency.

117% average premium

One striking similarity with the mineral block auctions last year has been the surprisingly high premiums quoted by the bidders. Just as bid premiums had spiralled over 100% for a majority of blocks on offer in 2020, SteelMint calculated the average bid premium this time at around 117%.

Such unrealistic 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. For example, Tata Steel's bid for the Gandhalpada iron ore block with reserves of over 314.37 mn t (Fe 60.48% average grade) was recorded at over 141%.

Likewise, Mumbai-based Raga Tradecon - a newbie in the Odisha mining circuit - placed a bid of 139.5% for the Netrabandha Pahar (West) block. Leading merchant miner Rungta Mines placed bids of 124%, 113.1% and 110.15% for the Purheibahal, Chandiposhi and Jumka Pathiriposhi Pahar blocks, respectively.

Keen to ensure raw materials security after termination of long-term sourcing arrangements, integrated steel producer JSPL won the Kasia block with iron ore resources of 278.04 mn t at a steep premium of 118.1%.

High premiums - the flip side

However, as SteelMint has previously reported, high premiums have had the paradoxical effect of companies coming forward to surrender mines acquired at auctions.

In Aug, 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.

A year after they were auctioned, many of the mines in Odisha failed to meet their respective MDPA targets and were slapped showcause notices. JSW Steel, Tata Steel, KN Ram, and Serajuddin & Co. have moved court.

Out of the 19 auctioned blocks in Odisha last year, 14 have commenced production in phases through 2020. While three of the blocks have been put up for re-auction this time.

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.

The unavoidable consequence has been shortfall in production thereby compounding the problems of end-users, especially smaller steel units that depend entirely on merchant sourcing of iron ore.

Impact on production

As per SteelMint data, iron ore production from the auctioned leases in Odisha decreased by 63% on the year in FY'21. Data shows that iron ore production from Odisha dropped to 107.1 mn t in FY'21 in comparison with 145 mn t in the previous fiscal. SteelMint data reveals that iron ore production in Odisha stands at 63.5 mn t till Aug in the ongoing fiscal.

It should be noted that the greenfield blocks auctioned this year will take time to obtain requisite clearances, which is bound to result in delay in operationalisation of the mines. However, it is difficult to guess whether production would be disrupted like in 2020 or whether the winning bidders would start production promptly. The supply situation could remain somewhat tight in the latter part of the fiscal due to expiry of key mining leases in Odisha.

Supply security & logistics

Tata Steel, JSPL, Vedanta ESL and even merchant miners who are morphing into end-users (such as Rungta Mines) have quoted high premiums for securing long-term hassle-free supplies, with an eye on upcoming capacity expansion.

Most major end-users who have won mines this year as well as in 2020 have already invested, or are in the process of investing, in logistics such as slurry pipelines, railway sidings, etc. with the objective of optimising costs in transporting iron ore to their respective plants. Huge cost optimisation through mine acquisitions and investments in logistics provide a rationale for high bid premiums.

Debate around NMI

In addition, heavyweight steel producers and the ISA have recently renewed their pitch for introduction of the National Mineral Index (NMI) that would supposedly streamline prices for different grades of minerals. Apart from addressing the issue of double royalty payment by miners, NMI is expected to regularise prices.

However, experts have suggested that aggressive bidding should be reduced so that the share of commercial mining in GDP improves. In the prospective NMI, unlike coal, iron ore imports should not be taken into consideration because import prices could raise the price index compared with the weighted average for grades and states published by IBM. This will result in raising the bid price for auctions.

Moreover, if NMI is implemented with retrospective effect it could give unfair advantage to the successful bidders, as the Odisha government had pointed out to the Ministry of Mines in a note earlier this year.