The chairman of global mining giant Vedanta Resources Ltd Anil Agarwal blamed the Indian steel industry for “dying” due to high auction premiums, limited blocks available, and slow mining activity at post X last Friday. Hours later, the Union Ministry of Mines issued a scathing complaint, also through X, calling Agarwal’s remarks “totally misleading” and “incorrect”.
“Can you run a successful business if you have to share more than 100% of your income with another party? I doubt if anyone would agree. But this is the reality of the Indian steel industry today. And it’s dying,” Agarwal’s post began.
He argued that although the government has introduced an auction system to increase transparency in mining, the limited number of blocks on offer, coupled with competition from steel producers, is creating a ‘significant imbalance in supply,’ making bids high. “The request depends on how much money you will share with the government. Since the launch of the auction, the rate of steel is 118%,” said Agarwal.
About twelve hours later, the mines department dismissed what Agarwal called “completely misleading”. “No mining company in India shares 100% of the company’s revenue with the Government,” its official X account said.
The post clarified that the auction bids determine the monthly payment that the company pays to the state government as a percentage of the original price of the iron ore mines, excluding transportation costs and added value of iron ore production. “The auction premium is not paid out of the total income of the company,” the department said.
Auction premiums are rising
Although the Department correctly pointed out that the auction premiums are applied to the average price of the metal auction, not the total revenue of the mining company, the premiums of the blocks sold since 2016 have increased significantly. High auction premiums squeeze profit margins, especially for unorganized mining companies and lower value chains.
Since the Mines and Minerals (Development and Regulation) Amendment Act, 2015 introduced the auction system, 121 ore blocks have been auctioned across India. Of these, 35 blocks requiring further exploration have been granted under composite licenses (CL).
For the remaining 86 blocks awarded under mining lease (ML), the average auction premium stands at 119 percent, according to an analysis of official auction data by The Indian Express. This figure has increased over the years – from 86 percent of the first eight blocks auctioned in 2016 to 171 percent of the latest 16 blocks auctioned in 2023.
The blocks offered are mature
Responding to Agarwal’s claim of supply disparity due to limited auction blocks driving up premiums, the mines minister argued that 17 blocks are currently under auction, while another 60 have been given to state governments. “Therefore it is incorrect to say that only limited blocks are given,” the post said.
Between 2020 and 2023, the Department has auctioned 97 iron ore blocks compared to 24 blocks in the previous four years. Four years before 2016, before the introduction of the auction regime, only four blocks were allocated to mining companies. In 2024, however, no blocks have been sold yet.
However, the number of available blocks has increased significantly under the auction regime. However, experts argue that offering even more blocks would help cool premiums, providing relief to smaller mining companies and those not integrated with upstream operations.
The ministry also noted that India’s iron ore production has increased from 129 million tonnes (MT) in FY15 to 274 MT in FY24. “India produced 144 million tonnes of steel in FY 2023-24 where the requirement of steel was easily met and in addition 46 million tonnes of steel was exported by India. Therefore, there is no shortage of iron ore in the country to support iron and steel production,” he added.
Damages mines that cannot be captured
A 2023 market study by the Competition Commission of India (CCI) found that the share of captive mines in the total number of iron ore mines has increased over the years. Steel producers with captive mines can get higher premiums at auctions through value addition, unlike companies with captive mines.
“The contribution of steel to the cost of steel produced is about 15%. Therefore, if a steel company uses the steel produced in its mine, it pays only a small percentage of the steel produced as auction price to ensure guaranteed supply of steel to run its steel plant,” the department said. in its post.
In contrast, rising auction premiums pressure the margins of companies not integrated into the mining and steel industries or those focused on exports. In FY24, about 46 MT of steel was exported from India, which is also the world’s fourth largest producer of the precious commodity.
The ministry also rejected Agarwal’s recommendation of 50 per cent revenue from auction premiums, saying “investment in iron ore blocks is a low-risk activity so there is no need to put any share in iron ore”.
Competitive anxieties
The CCI study also highlighted that large producers who gain control over the steel supply chain through captive mining can manage “fluctuations in raw material prices better”.
“This has created competition concerns due to the cost differential between steel producers with captive mines and those without. It is also noted that iron ore blocks sold at auction after 2015 are owned by certain companies such as JSW, which accounts for about 47 percent of the total number of auctioned lots,” the study noted.
Of the 4,300 MT of steel reserves auctioned under ML since 2016, 35 percent went to JSW Steel Ltd, 11 percent to Jindal Steel and Power Ltd—both vertically integrated steel players. Rungta Mines Ltd and Tata Steel Ltd got 9 percent and 7 percent respectively, while Vedanta Ltd got only 94 MT, or about 2 percent. The remaining 36 percent of reserves are awarded to various other players, small and large.
Mine operations are slow
“It is not surprising that many blocks are still not working. “Operating companies are now considering returning some blocks due to non-viability,” Agarwal also said in his post.
In response, the Ministry of Mines said that 34 of the 119 ore blocks in the auction have been processed, less than 30 percent. The department also expects another 21 blocks to be operational soon.
“It is wrong to say that the ineffectiveness of the blocks is due to the high number of auctions made by the bidders during the auction. The operation of the blocks requires obtaining various legal approvals such as environmental clearance, deforestation, etc. and land acquisition which usually takes 3-7 years after the auction, depending on the level of land survey. Since, many blocks have been auctioned within the last 3 years, it will take another 2-5 years to operate these blocks,” said the Department.