New Mining Cess To Increase Cost Pressure For Steel Makers: ICRA

Talabira Coal Mine Odisha . Image for representation (Source: Radhakisan Raswe/NDTV Profit)

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

The Supreme Court on Aug. 14 upheld the power of states to levy taxes on mineral rights and mineral-bearing land and allowed them to seek refunds 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 the margins of 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 where cess rates could vary between 5–15%.

The power sector, which is heavily dependent on coal, may see a rise in the cost of supply by 0.6–1.5%, potentially leading to higher retail tariffs, according to ICRA. 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," said Girishkumar Kadam, senior vice president and group head of corporate sector ratings at ICRA.

The recent Supreme Court ruling has brought renewed focus to the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004, which permits a 15% cess on iron ore and coal, according to ICRA. If fully enforced, it could result in an 11% 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 per 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.