Equitymaster
Indian steel industry is going through tough times. The demand for steel is slowing down because rising interest rate is slowing down spending on infrastructure sector which is the largest consumer of steel. This coupled with rising raw material costs is adding to the woes of the steel companies. The recent Supreme Court order to ban mining activities in the iron ore rich state of Karnataka could spell further trouble for the sector.
The apex court had earlier issued an order to ban mining activities in Bellary district of Karnataka due to increasing environmental degradation of the area. The Supreme Court further extended the ban on mining in Tumkur and Chitradurga districts of Karnataka.
Impact of mining ban on the steel sector
Karnataka accounts for 30% of India's steel output (more than 18 m tonnes) and about 25% of India's annual iron ore exports. The ban on two more districts, in addition to the one in Bellary, will result in a sharp decline of iron ore production which will be followed with a severe cut in steel production. Some of the plants in the region have already shut down, while several plants are running at lower utilization levels on the back of shortage of iron ore to feed their blast furnaces. Companies like JSW steel are running their operations at reduced capacities. In fact, JSW steel is forced to scale down production to 30% of its total capacity. Small players like Kalyani Steel have already closed their 1.1 m tonne plant due to unavailability of iron ore. Even if the steel companies bring iron ore from other states like Orissa or Jharkhand, freight cost will be about Rs 2,000 per tonne, which will increase production cost by Rs 4,000 per tonne, making steel production too costly.
Iron and steel shortage would lead to a cascading effect on the price of automobiles, consumer durables, construction and infrastructure. The direct employment loss would itself be about 80,000 and around 1 lakh jobs would be lost indirectly. It will also lead to idling of huge investment, socio-economic unrest in the region and loss of revenues to the tune of Rs 100 bn to the Centre and the State Government. Commercial banks could also suffer an asset deterioration of up to Rs 500 bn.
The Supreme Court has relaxed some of the restrictions on the ban by allowing state run NMDC to mine 1 m tonne of iron ore per month in Bellary region and auctioning of iron ore which are lying in the mines and stockyards. But this too is not sufficient to meet industry requirement. Unless the government and the Supreme Court reach an agreement on how to solve this crisis, the steel industry will continue to suffer.
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