Enforcement of new mining cess may increase cost pressure for steel makers: Icra

The enforcement of the new mining cess by some states following the Supreme Court ruling may bring challenges for the domestic steel industry by adding to the cost pressures, according to rating agency Icra.

On August 14, the Supreme Court upheld the power of states to levy tax on mineral rights and mineral-bearing land, and allowed them to seek refund of royalty from April 1, 2005 onwards.

This development is poised to compress operating margins across the sector, impacting both primary and secondary steel producers, Icra said in a note.

While margins of the primary steel producers could shrink by 60-180 basis points, secondary producers may face a more severe impact, with margins declining by 80 -250 basis points, based on various scenarios that cess rates could vary between 5-15 per cent.

The power sector, which is heavily dependent on coal, may see a rise in the cost of supply by 0.6-1.5 per cent, potentially leading to higher retail tariffs. Further, primary aluminium producers will also be impacted due to their high power consumption.

'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 the merchant miners are expected to pass on the increased costs," Girishkumar Kadam, Senior Vice-President and Group Head, Corporate Sector Ratings, Icra said.

According to Icra, the recent Supreme Court ruling has brought renewed focus on the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED), which permits 15 per cent cess on iron ore and coal. If fully enforced, it could result in 11 per cent increase in the landed costs of iron ore, directly impacting the cost competitiveness of domestic steel entities.

In a related move, the Jharkhand government recently imposed an increase of Rs 100/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 30-40 basis points.