The recent enforcement of a new mining cess by various states, following a Supreme Court ruling, may present challenges for the domestic steel industry by increasing cost pressures, according to rating agency Icra. On August 14, the Supreme Court confirmed that states have the authority to levy taxes on mineral rights and mineral-bearing land, and they can seek refunds of royalties dating back to April 1, 2005.
This development is expected to compress operating margins within the sector, affecting both primary and secondary steel producers. Icra’s analysis suggests that primary steel producers could see a margin reduction of 60-180 basis points, while secondary producers might experience a more significant impact, with margins potentially declining by 80-250 basis points, depending on cess rates which could range from 5-15 percent.
The power sector, heavily reliant on coal, could face a rise in supply costs by 0.6-1.5 percent, which may lead to increased retail tariffs. Additionally, primary aluminum producers, who have high power consumption, will also be affected.
Girishkumar Kadam, Senior Vice-President and Group Head of Corporate Sector Ratings at Icra highlighted that the imposition of a new mining cess by mineral-rich states could intensify cost pressures for the steel industry. Although most states have yet to set specific rates, any significant cess could adversely impact margins, particularly for secondary steel producers, as increased costs from merchant miners are expected to be passed on.
Icra also noted that the Supreme Court ruling brings renewed attention to the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED), which allows for a 15 percent cess on iron ore and coal. Full enforcement of this provision could increase the landed costs of iron ore by 11 percent, thereby affecting the cost competitiveness of domestic steel producers.
In a related development, the Jharkhand government has recently imposed an additional Rs 100 per tonne on iron ore and coal. While this increase is expected to have only a minimal impact on operating margins, reducing them by 30-40 basis points, it sets a precedent that other states may follow.
