New mining cess would exacerbate cost pressures on steel industry: ICRA

Steel Cess: The recent Supreme Court judgment allowing certain states to implement a fresh mining cess is expected to compound the woes of the ailing domestic steel industry, according to a report by rating agency ICRA. The August 14 verdict has upheld the right of the state governments to tax mineral rights and lands bearing the mineral, while it also allows the states to claim with retrospective effect refunds of royalty paid from April 1, 2005.

The move is likely to squeeze the margins across the steel sector, including those of primary and secondary steel producers. According to ICRA's analysis, primary steel makers are likely to see lower operating margins by as much as 60-180 basis points. In the case of secondary producers, if this trend hurts them more, the fall in margins could be 80-250 basis points depending upon the cess rates of 5 per cent to 15 per cent.

The short point is that the impact of the new mining cess is not going to stop at the steel industry. The impact on the power sector, which is heavily dependent on coal, will likely increase the supply cost between 0.6 and 1.5 percent, the additional burden of which will come back to the consumer in the form of higher tariffs on electricity. Huge consumers of power-besides steel-are the primary aluminum producers.

"The new mining cess imposed by key mineral-rich states could further pile on cost pressures for the steel industry. Most of the key states have yet to specify the rates. Industry observers said that any meaningful cess on the key raw material is likely to exert huge pressure on the already stressed margins, especially of the secondary steel producers, since a majority of them are merchant miners now likely to pass on the increased costs," Girishkumar Kadam, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, said.

The Supreme Court judgment has brought into focus again the Orissa Rural Infrastructure and Socio-Economic Development Cess Act, 2004, that seeks to empower the state government to levy a 15 per cent cess on iron ore and coal. If fully implemented, it would make iron ore costlier by 11 per cent, further denting the country's steel makers on the cost front.

In a related development, the Jharkhand government also increased royalty on iron ore and coal by Rs100/tonne, which may set a template for other states to follow. The impact on steel producers' margins is expected to be relatively small at 30-40 basis points.

(With PTI Inputs.)