Iron Ore Royalty Rise May Not Hurt Steel Makers' Margins: Fitch

Mumbai: The increase in India's iron ore royalty rates is not likely to have a major impact on the profitability of steel producers in the country, rating agency Fitch Ratings has said.

"We do not expect an increase in India's iron ore royalty rates to have a major impact on the profitability of steel producers in the country. Under the proposal approved by the Indian government, the royalty rate on iron ore will be increased to 15 per cent from 10 per cent," Fitch Ratings said in a statement.

The government has not yet said when the increase will be implemented.

The higher royalty rates will raise the input costs of Indian steel producers by $2-5 per tonne of steel produced, depending on the type and grade of iron ore used.

Fitch expects iron ore mining companies in India, which largely supply domestic users, to be able to pass on the increase given tight supply domestically, raising the input costs for both integrated and non-integrated steel producers.

It said steel producers are likely to be able to pass on their higher costs to consumers because of a likely improvement in steel demand in India. As a result, the higher royalty is unlikely to have a major impact on Indian steel producers' profit margins.

Fitch expects steel demand growth to start to improve from the second half of FY15, supported by a pick-up in consumption following rising consumer sentiments and an expected improvement in economic growth.

The improving consumer sentiment is reflected in passenger vehicle sales data compiled by the Society of Indian Automobile Manufacturers (SIAM) - sales volumes during June and July 2014 rose from a year earlier, compared with a six per cent fall in FY14.

Steel demand in India was weak during FY14 with consumption rising by just 0.6 per cent to 73.9 million tonnes, according to data from Joint Plant Committee, a government body that collects data on the iron and steel industry.

This was due to slow growth in the key steel consuming industries of automobiles, infrastructure, construction and engineering. Iron ore exporters, who already pay high export duties on their shipments, will face slimmer profit margins following the increase in royalty.

Iron ore exports other than pellets, already attract export duty of 30 per cent. India largely exports lower grade iron ore fines. The additional costs while global iron ore prices remain weak will significantly impact the competitiveness of iron ore exports from the country.