India Ratings and Research (Ind-Ra) expects EBITDA/t for the top six steel producers to come under further stress in view of the stipulated additional contribution by iron ore miners towards District Mineral Foundation (DMF) under the new mines and minerals (Development and Regulation) amendment act 2015. Consequently, the gross leverage of the top six steel producers in India could increase by 0.4x to 0.9x in FY16.
Ind-Ra estimates the additional payout could go up to Rs 71 billion, assuming a payout equivalent to 100% of the royalty as contribution to DMF. However, the additional burden on existing iron ore miners could reduce to Rs 23 billion if the payout to DMF is limited to 33% of the royalty by the central government, which has the flexibility to fix the contribution % to the DMF based on the category of mining leases. Miners would need an average product price increase of INR153/t-INR465/t to neutralise the impact of DMF, assuming 33%-100% contribution to DMF, respectively. In view of the increase in cost incurred post DMF introduction, the possibility of steelmakers passing on the additional burden to end-consumers remains constrained as the sector continues to grapple with excess capacity and declining prices of steel products. Furthermore, pressure from imports is acting against the price increase.
Ind-Ra expects primary steel producers having captive iron ore mines to see a higher payout in the immediate future than for producers without captive linkages. The latter depend on either the purchase of domestic iron ore from players such as NMDC or imports. For such players, profitability would depend upon their ability to source imported iron ore at competitive rates, which have declined 57% yoy to USD50/t. For entities dependent on domestic suppliers such as NMDC, the ability to negotiate prices would determine the impact on their cost structure.
The act has extended the period of mining lease up to 2020 for non-captive users of iron ore and up to 2030 for captive users. The same is likely to provide greater clarity to existing mine owners as contributions up to the period of lease are fixed, as against the e-auction route wherein aggressive bidding could have led to much higher pay-outs.
