The second phase of the iron ore auctions in Odisha will start soon with the last date for the sale of the tender document being 19 Aug’21. However, many feel, players must be careful with their bidding this time so that history does not repeat itself. They should refrain from paying premiums that are so high that will eventually make development of the block unviable, as it happened with the last auctions conducted in Mar’2020.
Cost heads
Importantly, bidders planning to sell in the merchant market must be aware of the several cost heads involved.
- Part of GST to become cost: First, they should take into account the GST aspect. For instance, GST is one of the cost burdens which had not been considered by the previous bidders in the Mar’20 auctions. The GST payable to the government is 18% but only 5% is recoverable via sale. Hence, 13% becomes a cost.
- Additional expenses: If a prospective buyer, for instance, is bidding at a premium of 100%, there will be additional expenses in the form of royalty at the rate of 15%, DMF @ 10% of the royalty and NMET @ 2% of the royalty which will add up to 17% . That apart, the bidder will have to pay 3% as crushed fines royalty loss plus another 13% in the form of GST loss, which add up to 16%. There is a production cost of 5-7%. These all add up to an additional 38-40%, taking the actual total cost to 138-140%.
- IBM price: Thirdly, the premium will be in relation to the IBM price. If the IBM price is fixed at say INR 7,000/t for Fe60% grade fines, the cost the bidder will have to pay will amount to 140% of this IBM price, which will be INR 9,800/t (140% of INR 7,000/t=INR 9,800/t). However, if the price prevailing in the market is say INR 7,500/t, the bidder will have to pay the difference of INR 2,300/t (INR 9,800/t-INR 7,500/t = INR 2,300/t) from his own pocket.
“Efforts by the industry to reduce the IBM prices have gone in vain, including the reduction of the royalty from the IBM prices, as this is a direct loss to the Odisha government,” says an industry source.
Second round of auctions
More than 60 companies will be in the fray in the forthcoming Odisha auctions. The Odisha government has issued notice inviting tenders for e-auction of 11 mineral blocks, including seven new, for grant of mining leases. Of the 11 blocks offered, seven are of iron ore, two of iron ore and manganese, while one has reserves of iron ore and dolomite and another, only bauxite.
Learning from past experiences
Learning from the auctions held last year, the Odisha government, on the other hand, has made the rules stringent for the second round. These include charging a penalty if the mine owner falls short of the volume fixed in the Mine Development and Production Agreement (MDPA) on a quarterly basis. The mine will be taken back if the MDPA shortfall is not made up within three quarters.
The Odisha government had come up with auctions for 19 iron ore mines where the prospective buyers had bid at abnormally high premiums that started from 90.9% and went up to as high as 154%. Such high premiums eventually made the mines commercially unviable. Of these, 14 have started production, two have not while three have again been put to auction in the second phase.
Production target from the auctioned mines in FY’21 was at 51 million tonnes against the previous year’s 71mn t. However, actual output, at around 26 mn t, fell short of the target since many miners could not start production or were struggling with huge liability in the form of the MDPA shortfall.
Outlook
Ideally the premium should be kept at less than 100% otherwise, the bids will become unviable. “Only if the premium is kept at less than 100%, will the miners be able to keep some margins,” said a source.
Prices as on 8:55 IST, 05 Aug. d-o-d changes indicated against closing price of 04 Aug.
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