The Business Bytes
New Delhi, August 26, 2024 (TBB Bureau): The domestic steel industry is bracing for a significant challenge following a recent Supreme Court ruling, with several states poised to impose a new mining cess that could severely impact profitability. According to ratings agency ICRA, this development is likely to compress operating margins across the sector, affecting both primary and secondary steel producers.
ICRA’s analysis indicates that primary steel producers could see their margins shrink by approximately 60-180 basis points. Secondary producers, already grappling with lower profitability, might face even more severe consequences, with margin declines ranging from 80 to 250 basis points. These projections hinge on the potential variation in cess rates, which could range from 5% to 15%.
The ripple effect of this ruling is not confined to the steel industry alone. The power sector, heavily reliant on coal, may experience a rise in supply costs by 0.6% to 1.5%, potentially leading to higher retail tariffs. Additionally, primary aluminium producers, who consume substantial power, could also face increased costs.
Girishkumar Kadam, Senior Vice-President and Group Head of Corporate Sector Ratings at ICRA, commented on the situation: “The enforcement of the new mining cess by key mineral-rich states can heighten cost pressures for the steel industry. While most states haven’t set the rates yet, any substantial cess implemented could adversely impact margins, especially for secondary steel producers, as merchant miners are expected to pass on the increased costs. Consequently, the implementation strategies adopted by various state governments will be crucial in shaping the competitive landscape of the steel industry.”
Odisha, a key mineral-rich state, plays a particularly vital role in this scenario. The recent Supreme Court ruling has brought renewed focus on the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED), which permits a 15% cess on iron ore and coal. If fully enforced, this could result in an 11% increase in the landed costs of iron ore, directly impacting the cost competitiveness of domestic steel entities.
In a related move, the Government of Jharkhand recently imposed a modest increase of Rs 100 per tonne on iron ore and coal, setting a precedent that other states may follow. This increase is expected to have a minimal impact on steel entities’ operating margins, reducing them by around 30-40 basis points. Even if other states adopt similar measures, the overall impact will likely remain modest.
Moreover, the possibility of states applying the cess retrospectively introduces additional uncertainty, potentially burdening companies with past tax liabilities. “If the cess is applied retrospectively, it could increase financial pressure on steel companies. However, the Supreme Court’s provision for staggered payments over 12 years starting from April 1, 2026, without any interest and penalties on past demands offers some financial relief,” Kadam added.
The implications of this ruling extend beyond the steel sector, with industries like aluminium and power also facing potential cost increases. For primary aluminium producers, assuming a 15% cess, costs could rise by approximately Rs 1,200-1,300 per tonne ($15-$16 per tonne), representing 0.6% of current aluminium prices.
