The Australian Government's decision to impose a new tax on a portion of profits made by local iron ore and coal miners could adversely impact the profits of steel makers in India.
Both groups import thermal and metallurgical coal whose prices are likely to rise following the imposition of this new Mineral Resources Rent Tax. Under the new regime, profits from iron and coal miners will be taxed at 30 per cent. But the effective rate may work out closer to 22.5 per cent, following deductions on royalties paid to State governments, capital costs and a 25 per cent allowance.
The miners may be in a position to pass on this impost to their user industries worldwide. The coal and iron ore mining industry is far more consolidated than the steel and power producers they supply to. This translates into pricing power. Back-of-the-envelope estimates indicate that miners could pass on the hike if they raise selling prices by a minimum of 4 and 10 per cent respectively on coal and iron ore.
All of India's top steel producers such as SAIL, Tata Steel, JSW Steel depend on metallurgical coal imports from Australia. Tata Steel with its sizable European operations is likely to be the most impacted given they depend entirely on external sources for ore. JSW Steel follows as it has few captive sources for ore. SAIL depends on imported metallurgical coal for 60-70 per cent of its requirement.
In contrast, NMDC and Sesa Goa could benefit from this tax as a result of higher iron ore prices. NMDC, Jindal Steel and Power and Bhushan Steel are three segment players who own iron ore and coal assets which are in the exploration stage.
DOMESTIC PRICES
In fact, a hike in Australian prices could possibly raise domestic iron ore prices too. NMDC and Sesa Goa too benchmark their own prices to agreements between Chinese steel producers and Australian iron ore miners. International iron-ore prices also influence the Indian Bureau of Mines iron ore price listing. This may increase the royalty outgo from steel producers with captive iron-ore mines such as Tata Steel's domestic operations and SAIL.
As for the power sector, Indian thermal players who recently earned some respite in the form of a lower import duty on coal will have reason to be nervous. As of now only a small proportion (8 per cent) of coal for power is imported. Much of these imports are from Indonesia and not Australia. But a few Indian companies have lately been acquiring Australia's coal assets to meet their future fuel requirements.
Lanco Infratech, Adani Enterprises, GVK Power and CESC are a few companies which have picked up stakes in Australian coal mines. They will be using a bulk of the output for captive consumption. However, supply from these projects will commence only over a 2-3 year time frame. The coal projects of Adani Enterprise and GVK Power will be operational beyond 2014. The time lag may allow projects enough time to recover extra costs. These companies may be able to build the costs into new purchase agreements.
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