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SAIL unaffected by export duty hike on iron-ore

" SAIL sees no impact on margins due to hike in export duty of iron-ore," CS Verma, chairman of SAIL tells CNBC-TV18. The government recently announced that export duty on iron ore has been raised to 30%.

Verma says that the company has sufficient mines to last a while; about 3-4 billion tonne captive iron-ore mines. Therefore, they will not need to go to the market to procure the raw material. SAIL can neither sell in the open market, domestic or overseas. "In that sense, iron-ore is not profit making for us, but export duty hike has absolutely no impact," Verma says.

In fact, the company has signed a deal with Kobe Steel to produce 0.5 million tonne of iron-ore per annum.

Going ahead, he sees coking coal prices dipping in the near future.

Below is the edited transcript of the interview.

Q: Your take on this announcement itself that the export duty on iron ore has been raised to 30%?

A: As far as SAIL is concerned, we have captive iron-ore mines. Presently, iron ore production from the captive mines is about 24 million tonne per annum. When our capacity gets doubled in the next one year, our requirement of iron-ore will be roughly about 45 million tonne per annum. We are having sufficient reserves in the captive iron-ore mine which is roughly to the tune of 3-4 billion tonne. So we won't have to procure iron-ore from the market. But again as a stipulation, we cannot sell the iron-ore in the open market. So iron-ore is not profit making and it is not profit-oriented for us.

So there is no impact on SAIL as far as increase in the export duty on iron-ore is concerned because we cannot sell the iron ore either in the domestic market or in the overseas market.

As far as the steel industry is concerned, this will definitely curtail export of iron-ore; fines and iron-ore lumps; from India, and this will increase setting up of the value-added products based on the iron-ore fine and iron-ore lumps in India. I can foresee more palletisation, more ballastation plants being set up in India because the export duty on exports of pallets is 0%. So now the emphasis and the encouragement will be to export the value-added products rather than exporting the minerals.

Q: Can you now elaborate on the joint venture you have with Kobe Steel?

A: We have signed a term sheet with Kobe Steel. This is to produce iron ore nuggets with the capacity of 0.5 million ton per annum. This is based on the ITmK3 technology. The plant will come up in Durgapur. The total investment required will be Rs 1500 crore and ITmK3-based RNO nugget plant, there is only one plant operational in Minnesota in the USA which was also set up by Kobe, because this is a patented technology of Kobe Steel. So second plant based on this technology will come up in India.

Q: What is the timeframe and by when could we see some contribution coming from this?

A: The gestation period involved is roughly about two years from the date we start the construction. The construction will start after at least six-eight months. So we will see value addition coming from this project only after nearly three years.

Q: What is your take on the government's divestment plan which is now expected to eat into companies' or PSUs' cash balance? In particular for you what is your view on this keeping in mind the investments SAIL has in hand, going forward?

A: The plan in this regard by the government in clear-cut terms is yet to be notified. I will be able to give my comments only once I have seen the scheme approved by the government.

As far as SAIL is concerned, yes we are having cash in bank, but we have also taken up massive expansion and modernization programs. Today our capacity is 14 million tonne and we are escalating our capacity to 24 million tonne. The total investment required is roughly about USD 14-15 billion, that is roughly about Rs 75000 crore and bulk of this investment will come from our internal resources. We are having very high net worth position too.

Principally speaking, I am not opposed to buyback of shares, but let me see the scheme; only then I can give my comments.

Q: In the second quarter you saw a notional loss of Rs 500 crore on account of rupee depreciation. Since September 30th rupee has depreciated further. Should we expect more notional losses?

A: See let me prepare and present my quarterly accounts, and then I will tell you how much impact we are going to take. I may add that this mark-to-market, it is only a notional provision. When we have to really make the payment, only then we will have to see how much impact we are taking. Over the past five years, the average dollar-rupee conversion value has been roughly around Rs 43-44 and highest level has been Rs 53-54. So these are abnormal levels, I think in due course of time, these levels have to subside and stabilize.

Q: There were reports that your company were sitting on high-cost coking coal inventories purchased at USD 330 per tonne. Is this inventory exhausted? Can you also give us your outlook on price of raw materials like iron-ore and coking coal?

A: As far as SAIL is concerned, we are not having any inventory of coking coal which was bought at high cost of USD 300-330 per tonne. Those were the times when there were heavy floods in Australia, and all the major coal mining companies introduced force majeure conditions. This happened last year, December 2010, but now all the companies they have resumed normal operations and normal mining activities are going on in Australia. So all this high level inventory which was purchased at that spell of time, it has been consumed by us.

Now, with the passage of time, coking-coal prices are softening. In April 2010, the coking-coal prices internationally were prevailing at about USD 125 per tonne. Then it went up to a level of about USD 200 per tonne by December 2010 and after this force majeure conditions by the Australian companies, it went up to the level of about USD 325 per tonne. With the passage of time, since resumption of normal mining operations by these companies, prices have started coming down, and today the prevailing level is somewhere between USD 200-220 per tonne. In fact, some companies are selling less than USD 200 per tonne too, and in the times to come, I foresee these coking coal prices will stabilize further.

The iron ore prices are prevailing above USD 140-145 per tonne now, and even this is too high a level. Iron ore prices at some spell of time, three months back were above USD 125-130 per tonne. I think in times to come, there is a possibility of iron ore prices further coming down.