By Rajesh Kumar Singh - Nov 7, 2012
Bloomberg
Steel Authority of India Ltd., the country’s second-biggest maker of the
alloy, will stop work at an iron ore mine in the eastern state of
Odisha to make way for an elephant corridor, two people familiar with
the matter said.
The environment ministry won’t renew the state-owned company’s permit
after a two-year extension expires on Nov. 10, the people said
yesterday, asking not to be identified as they aren’t authorized to
speak to the media. Odisha, where a government panel is currently
reviewing illegal mining and environmental damages, plans to set up a
passage way for the pachyderms near Steel Authority’s mine, the people
said.
The stoppage at the Bolani mine will cut the New Delhi- based company’s
iron ore output by almost 20 percent and impair 2.8 million tons of
steelmaking capacity. Buying the raw material from the market may raise
costs by $70 a ton, said Ravindra Deshpande, an analyst at Elara
Securities Ltd., further eroding profit that has declined in eight of
the past nine quarters.
“Captive iron ore is Steel Authority’s biggest advantage and the closure
is certainly a big hit to profitability,” Mumbai-based Deshpande said
in an interview yesterday.
At an average price of 35,000 rupees ($643) per ton of steel, the
shutdown may result in an average revenue loss of 98 billion rupees,
imperiling the company’s expansion. New Delhi- based Steel Authority
plans to spend $13 billion to boost steelmaking capacity by 60 percent
to 21.4 million tons annually, improve products and develop mines.
Maoist Rebels
Steel Authority will attempt to make up for the closure by raising
output at other mines and by using low-grade ore, the people said. Steel
Authority’s spokeswoman Arti Luniya didn’t answer two calls to her
office.
The company, which has the capacity to extract about 25 million tons of
iron ore at its mines, is already struggling to tap a reserve in the
central state of Chhattisgarh in the face of attacks by Maoist rebels.
New Delhi-based Steel Authority’s shares rose as much as 0.9 percent to
83.15 rupees and traded 0.4 percent higher as of 9:30 a.m. in Mumbai.
The stock has climbed 1.5 percent this year, compared with a 22 percent
gain in the benchmark BSE Ltd. Sensitive Index (SENSEX) and a 20 percent
advance in the shares of the nation’s No. 1 Tata Steel Ltd. (TATA)
Of the 50 analysts that track Steel Authority shares, 17 recommend
buying them, while 19 advise selling, according to data compiled by
Bloomberg. The rest have a hold rating.
Illegal Mining
India’s federal government is cracking down on illegal mining and has
set up a panel to probe extraction in seven mineral-rich states
including Goa, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha and
Karnataka.
“A comprehensive audit of mining across the country is necessary to
assess the impact on environment, lives and also the extent of
illegality,” former Mines Secretary Vishwapati Trivedi said in
September.
Getting environment and forest clearances for projects can take as long
as seven to eight years, according to N.C. Jha, head of mining at Monnet
Ispat & Energy Ltd. (MISP) and former chairman of Coal India Ltd.
(COAL) The environment ministry has stepped up vigilance in recent
years, with violations leading to restrictions and bans by the Supreme
Court and local administrations.
India had 27,694 elephants as of 2008, according to data on the website
of the Ministry of Environment and Forests. In Odisha, almost 5,000
hectares (12,355 acres) of prime elephant habitat is encroached by
mines, erasing corridors used by the animals for thousands of years,
according to the website of the Wildlife Protection Society of India.
‘Irreversible Change’
“Elephants don’t need a very large area to move, but they need forest
cover for a sense of security,” said Dipankar Ghose, New Delhi-based
director of species and landscapes program at WWF-India. “The associated
development around the corridor makes them insecure and makes them
react violently to the environment. If an animal species is exterminated
from a place, it’s an irreversible change.”
The federal government, the main shareholder of Steel Authority, will do
everything to resolve the issue as it needs to raise money by selling a
stake to narrow its budget deficit, said Niraj Shah, an analyst at
Fortune Equity Brokers India Ltd. in Mumbai.
“There’s a lot at stake here,” he said. “It’s not just about SAIL’s
profitability, but it can also affect the government’s disinvestment
plan.”
Rating Threat
Finance Minister Palaniappan Chidambaram plans to raise at least 300
billion rupees from the sale of state-owned shares in companies
including Steel Authority to bolster strained finances after Standard
& Poor’s and Fitch Ratings earlier this year cut the credit outlook
for local sovereign debt to negative, a step away from lowering the
rating to junk status.
Steel Authority’s profitability is derived from its own sources of iron
ore for its entire need, though it depends on imports of coking coal to
meet 70 percent of its requirements, making it the second-biggest
spender on raw material among the three biggest steelmakers in the
country.
The company’s cost of turning iron ore into a ton of steel was 16,464
rupees in the year ended March 31, more than double that of JSW Steel
Ltd. (JSTL)’s 8,105 rupees, according to Fortune’s Shah. Tata Steel
incurred 21,703 rupees.
A shutdown of the mine may help smaller makers of the alloy to gain
market share. NMDC Ltd. (NMDC), India’s largest iron ore producer, may
increase prices more frequently if more mines across the country are
closed, Shah said.
In addition to higher costs of procuring ore, steel prices that have
remained little changed locally will also hurt Steel Authority, Elara’s
Deshpande said.
Producers in India have been holding prices, waiting for the festive
season to boost demand. Steel Authority kept prices unchanged this
month, Chairman C.S. Verma said on Nov. 1, adding the company will
review prices in a week. The slowing pace of construction and high
interest rates are not allowing prices to rise, he said.
Sourcing ore externally “isn’t a good choice when steel prices are weak,” Deshpande said.
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