The Mines & Minerals Development and Regulation Act which was amended in 2015, had extended the leases of both merchant and end-users. However, the leases are slated to expire on 31st March 2020.
The government of Odisha has invited bids through the process of tendering for the reallocation through auctioning.
The auctioning of iron ore mining has gone halfway through and the current auctioning marks the end of the existing regime. Presently, auctioning and bidding process has been completed for 10 mines.
Odisha being the major contributor towards mineral production contributes more than 50 percent of the total iron ore production in India. The auctioning of the 19 iron ore mine is going on, out of which the 15 mines have iron ore reserves, three has both iron ore and manganese and the rest has only manganese.
The auctioning is a two-stage process- the first stage involves quoting the initial price offer by the bidder (The price offer is a bidding parameter which includes the percentage of revenue to be shared with the government). During the second stage of bidding, the qualified bidders are ranked as per the descending initial price offer submitted and the higher offer is set as the floor price for the second round of bidding to commence. The bidding thus proceeds and the highest bidder is declared as the preferred bidder.
Present Auctions Insight
The revenue premium shared with the government for the 10 iron ore mining leases has been extensively high. These percentages are as follows: 95.2, 98.05, 107.55, 118.05, 132, 135, 110, 90.90, 92.7 and 141.25 respectively. Moreover, six major mining leases account for 91 percent of the total value of the estimated reserves and 92 percent of the volume of the total reserves. The concluded auction has witnessed an increase in the share of iron ore production by the end-use steel makers whereas the share has substantially decreased for merchant miners.
The government has classified the mines into two categories- the captive and the noncaptive or open mines. Some mines are primarily reserved for the captive use of end-users while some are included in the open category.
A mine earmarked for end users can only be bid by end users only and is not available for bidding by the merchant or standalone miners whereas the open mines can be bid by both end-users and merchant miners. This has led to an absence of level playing field in the competitive bidding space and has put merchant miners in a distinct disadvantage position.
The revenue share premium that a bidder must pay the government is a cost that he has to bear. Additionally, the bidder must pay the royalty price and other statutory dues such as the contribution to the district mineral fund, etc which accounts for about 17 percent of the sales revenue. Moreover, the bidder pays a GST of 18 percent. Thus, collectively the premium range varies from 95.2 to 141.25 percent which means that for every Rs 100 a bidder earns, the cost incurred is more than the revenue and can sometimes account for more than 190 percent of his earnings, excluding wages, salaries and other costs of operations. Taking into account all these expenditures the cost will be substantially high compared to the revenue.
Taking into consideration the costing, the merchant miner cannot bid premium more than 50 percent in order to sustain and thus provides ample scope for the captive miner to bid higher than a merchant miner because it is possible for an end-user to absorb the high cost of revenue share in his product price. But unfortunately, this is not so for merchant miners. The captive miners have the opportunity and privilege to absorb the high share of premium by adjusting their price.
Thus in a free market, the product prices can be increased to absorb the cost and pass expenses to the consumers. The present prevailing government policies thus work in favor of captive miners and the cost incurred in paying the premium will be ultimately recovered from the consumer.
The present scenario depicts that an uptrend in steel prices is likely to be witnessed post-April, 2020.
