Lower than expected payout towards the district mineral foundation (DMF) for steel producers and its applicability being non-retrospective will lead to improvement in margins for steel producers, says India Ratings and Research (Ind-Ra).
The rating agency said that fixing DMF contribution at a significantly lower value compared to the earlier maximum limits offers relief to miners especially in the backdrop of weak commodity prices.
The lower payout under DMF and the imposition of the safeguard duty on hot-rolled coils announced last week could benefit steel producers who are reeling under a stressed credit profile given muted demand growth, low capacity utilization and significant imports.
The notification specifies a DMF contribution at 10 per cent of royalty rate for miners granted mining lease after the cut-off date of 12 January 2015 and a DMF contribution at 30 per cent of royalty rate for miners which had been granted the mining lease before the cut-off date. The Mines and Minerals (Development and Regulation) (Amendment) Ordinance, 2015 promulgated on 12 January 2015 which was then enacted on 27 March 2015 had specified the maximum contribution to the DMF at 100 per cent for existing miners and 33 per cent for new miners.
Ind-Ra believes the lower contribution to DMF and the recent imposition of the safeguard duty on hot rolled coils import to be directionally positive for the steel producers. Ind-Ra in its commentary "Safeguard Duty to the Rescue of the Steel Sector" highlighted that post the imposition of the safeguard duty the landed price of hot-rolled coils imported from China will be costlier compared to domestic steel prices by Rs 2000/t.
Post imposition of the safeguard duty and the lower contribution to DMF, steel producers would have a net positive contribution of Rs 1,825/t assuming specific consumption of iron ore at 1.75x per tonne of saleable steel. This also assumes that domestic steel producers will be able to sustain higher selling prices. However, the possibility of such a price advantage would be contingent upon the reaction of the Chinese exporters, because if they were to lower their price further, as had been the case in the past, the Indian steel producers may not derive the expected benefits.
Ind-Ra has outstanding rating on Tata Steel Limited's ('IND AA'/Negative) and SAIL Limited (IND AAA/Negative) and JSW Steel (IND AA/Stable).