Crisil’s base case scenario assumes a 15-20% on-year rise in Indian iron ore prices in the fiscal year through March 2021 (FY21), with new iron ore mining leases auctioned in a phased manner from the third quarter of FY20.

In March 2020, over 30 iron ore mining leases accounting for 50-55% of Odisha’s and 10% of other states’ production will expire. This could lead to a -30% reduction in iron ore output. All these leases are held by merchant miners. Odisha produced 114 million tonnes of iron ore in FY19, over half of India’s output.

This base forecast assumes mines will be opened largely for merchant miners, given they have owned them for over a decade. Moreover, the entire ecosystem of secondary steelmaking in the eastern region feeds from these mines.

In this scenario, supply disruption will be limited. “While the rise in iron ore prices will depend largely on the auction premium, under the base case, we believe the premium will be more rational, keeping the long-term landed prices in mind,” Crisil says in a report seen by Kallanish.

The optimistic scenario assumes lease extensions of 2-3 years for existing mines, leading to no domestic supply disruption. The pessimistic scenario assumes a delay in the auction process, with the auction open to both captive and merchant steelmakers. In this case “…larger steel players would bid higher premiums to ensure long-term supply because of better financial muscle, translating into a greater rise in iron ore prices for them,” the credit rating agency comments.

In FY20 Crisial expects the landed price for a non-integrated steelmaker on the eastern coast to be around INR 3,600-3,700/tonne ($52-54), including royalty, other charges, and freight.

Captive steelmakers who have won new iron ore leases at high bid premiums in the past two fiscals, would witness a 5-8% rise in their iron ore costs versus the earlier merchant-procurement price.

Revenue growth for larger players will come under pressure in the current and next fiscal, because of an expected decline in domestic flat and long steel prices following the global trend, Crisil concludes.