Tata Steel seeks tie-up for sourcing iron ore from NMDC

Mumbai: Tata Steel Ltd has bought 100,000 tonnes of iron ore from NMDC Ltd in the last two months and also sought a long-term supply tie-up with the state-run miner in the backdrop of its captive mine in Odisha remaining shut owing to regulatory and legal action and the commissioning deadline of end-fiscal year 2015 (FY15) for its new plant drawing near.

“Tata Steel has started sourcing small quantities of iron ore from NMDC from June 2014 by participating in the e-auctions being conducted by NMDC from time to time,” said Narendra Kothari, chairman-cum-managing director of NMDC, in written replies to an emailed questionnaire.

“The price quoted by Tata Steel vary from auction to auction. Till now, Tata Steel has successfully bid for a quantity of about 100,000 tonnes during the period of June 2014 to August 2014,” he added.

Tata Steel has also asked the miner for a long-term supply tie-up, according to another senior executive in NMDC who declined to be named because of company policy, but Kothari did not say if the firm would agree to Tata Steel’s request.

“Tata Steel can participate (in the e-auctions) and get the iron ore, provided they are the successful bidders,” Kothari added.

Most of NMDC’s long-term clients have been buying ore for the last few decades, and the firm is inclined to serving them in the light of a shortage of iron ore in India, the executive quoted above said.

The company’s Khondbond mine—nearest to its forthcoming Kalinganagar plant in Odisha—was shut down after the Supreme Court’s interim order of 16 May. In response to a petition by lawyer-turned-politician Prashant Bhushan, the court ordered the closure of mines that were functioning on deemed leases, which shut down nearly half of the mines in the state.

A spokesperson for Tata Steel admitted that the company has been buying iron ore from outside to mitigate risk, but in the last two years it has been more regular.

“Tata Steel tries to source and use iron ore from different sources within and outside India to check the operational parameters of its various blast furnaces,” the spokesperson said in a reply to an emailed questionnaire, adding that this is done to maximize operational performance, use the best blend of iron ore, mitigate any risk from supply disruptions, and check any logistics and infrastructure bottlenecks.

The spokesperson did not say how much iron ore has been sourced from outside, or which plant it was meant for, although market participants said the company has stepped up its purchases from firms, the open market and overseas miners in the last few months.

But the iron ore procured at market prices is expensive and would hurt the profitability of the company at a time when it is banking on the Kalinganagar plant’s production to shore up earnings and help cut debt.

The senior executive in NMDC said logistics for the supply of iron ore from its Bailadila mine in Chhattisgarh to Tata Steel’s Kalinganagar plant in Odisha would involve a high freight cost of approximately Rs.2,000 a tonne in addition to the Rs.3,600 a tonne cost of the ore.

Tata Steel’s other three captive iron ore mines in Jharkhand and Odisha —Noamundi, Joda and Katamati—have plenty of reserves, but they are far from the Kalinganagar plant, which would involve high freight cost, besides they supply to the flagship Jamshedpur plant.

“The cost at which the non-captive ore is coming will be unbearable for Tata Steel,” said Prakash Duvvuri, head of research at metal and mining information and data website OreTeam. “On per tonne basis, the profit margin could get squeezed by 25-30% easily.”

According to Duvvuri, Tata Steel’s landed cost of getting iron ore from the Khondbond mine would have been around Rs.2,200 a tonne against iron ore from local sources at about Rs.5,600 a tonne and that imported from Australia at about Rs.6,900 a tonne.

The company’s senior officials have reiterated that they are doing their best to have the Khondbond mine reopened.

“We are in discussion with the government in Odisha and we hope that we will resolve the issue,” said T.V. Narendran, managing director of Tata Steel India and South-East Asia, on the sidelines of the company’s annual general meeting (AGM) on Thursday, when reporters asked if the firm had sufficient iron ore to start the new plant.

“It (Khondbond) was a mine that was in the process of being developed. We were producing about a million tonnes (mt) there and we were in the process of developing that to service the Kalinganagar plant,” Narendran added.

In his email, the spokesperson said, “...we are hopeful that the ‘express order’ for Khondbond mine would be issued shortly (by the Odisha government)”.

According to a research report by IL&FS Institutional Equity dated 13 August, the slow pace of capital expenditure incurred by the company in Odisha in the first quarter of FY15 raises concerns about a likely delay in the project commissioning by three-six months.

“Delay in commissioning Odisha project would be a risk to earnings,” said the report.

At the company’s AGM last week, Tata group chairman Cyrus Mistry told shareholders that Tata Steel produces about 17 mt of iron ore per year.

In the current fiscal year, it will produce around 9.7 mt of steel at its Jamshedpur plant, running at nearly full capacity. The company, with a global capacity of over 28 mt, is India’s largest steel maker.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.