JSW Steel, which has historically had more reliance on the open market to meet its iron ore demand, is aggressively bidding for acquiring more captive mines, or mines under its leasehold.
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Meanwhile, Tata Steel, which currently procures all its iron ore from captive mines, is exploring meeting at least part of its requirement from the open market as the lease on several of its key mines expires in 2030.
The strategies will be closely watched by large independent miners like NMDC Ltd and Odisha Mining Corp. Ltd (OMC), who supply iron ore to the steel sector.
These strategies could also have a big implication for the government exchequer, which makes significant revenues through royalties from the allocation of mining blocks. The competition for mining blocks dictates the prices fetched by these national resources in auctions.
Tata Steel’s captive sources
Tata Steel is evaluating how much of its iron ore procurement it wants to meet from captive sources “because if the bid premiums are very high, then it really doesn’t make sense to have 100% captive because you can get it cheaper from the market,” T.V. Narendran, the managing director of Tata Steel, said in a recent post-earnings call with analysts.
Bid premium refers to the amount that mining companies pay the government as royalty on top of the base price. To acquire the rights over a mine at an auction, companies bid in terms of how much premium they are willing to pay. Bid premiums could go upwards of 100-150% under aggressive bidding for coveted assets.
Narendran harked back to the company’s reduced reliance on captive coal mines over the years. “Twenty years back, 65-70% of Tata Steel’s coal was captive. Today, only 15-16% is captive,” he said. “We made the transition in coal, and we are planning the transition in iron ore, so that we mitigate the cost impact as much as possible.”
To be sure, the company will still have some captive mines beyond 2030. These include mines it acquired through the acquisition of Neelachal Ispat Nigam, Bhushan Steel and Usha Martin. It has also acquired the Gandhalpada mine in Odisha through auction.
JSW Steel bids big
JSW Steel will bid for all new mines coming up for auction in Karnataka and Goa, its joint managing director Jayant Acharya told analysts in a recent post-earnings call.
“There are some new mines, 10 mines which are coming up for auction (in Karnataka), and we would be bidding for those as well. Similarly, if more auctions come up in Goa, we would be looking at that as well,” he said.
The company met about 39% of its iron ore demand from captive mines, a number that it is looking to ramp up in coming years as it operationalizes its recently acquired mines and acquires new mines.
The rush for captives
“Iron ore is the most critical resource for steelmakers. If mines are available at a reasonable price, steel producers would prefer 100% integration for iron ore,” said Sumangal Nevatia, associate director at Kotak Securities.
“Captive mines have strategic importance as they give raw material security. Steel companies do not mind paying higher than market price for captive iron ore to reduce their dependence on market purchase,” he added.
Nevatia explained JSW Steel’s aggressiveness in bidding for captive mines, pointing out how it had been “completely reliant on the market for iron ore a few years back and has been at the receiving end in the last decade due to several instances of supply disruption on state mining bans”.
Meanwhile, Tata Steel may not bid so aggressively as it doesn’t require new mines until FY30, he said.
The logistics
Another reason for the divergence in strategies emerges from another key cost that steelmakers must factor in—logistics.
The JSW Group has been investing in logistic assets like a slurry pipeline, ports and berths, which bring down JSW Steel’s logistics cost. This allows the company to bid aggressively for mines as the cost will be offset by lower logistics costs, said Dhruv Goel, the chief executive officer of BigMint, a leading market intelligence firm.
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“Even if they pay 100% premium, they can mitigate that cost by the reduced logistics costs,” Goel said. Meanwhile, it doesn’t make a business case for Tata Steel to pay very high premiums, he said. Most of Tata Steel’s key assets are located within the mineral-rich belt spanning Odisha and Jharkhand, reducing its logistics cost for iron ore compared to peers, he said.
