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Bengaluru: The domestic steel industry may experience a reduction in operating margins by 2.5 per cent due to increased cost pressures resulting from the retrospective enforcement of mineral cess by some states (effective April 1, 2005), according to a report by ratings agency ICRA, released on Monday.
While the margins of primary steel producers could shrink by approximately 60-180 basis points, secondary producers may face a more severe impact, with margin declines ranging from 80 to 250 basis points, depending on various scenarios of cess rates, which vary between 5 per cent and 15 per cent.
Moreover, the power sector may face a 0.6 per cent to 1.5 per cent rise in supply costs, potentially leading to higher retail tariffs. Primary aluminum producers will also be impacted due to their high power consumption.
In a verdict on July 25, the Supreme Court ruled that states have the legislative authority to impose taxes on minerals, in addition to the royalty levied by the central government.
According to the report, the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED) permits a 15 per cent cess on iron ore and coal. If fully enforced, this could result in an 11 per cent increase in the landed costs of iron ore, directly impacting the cost competitiveness of domestic steel entities.
The government of Jharkhand recently imposed a tax of Rs 100/tonne on iron ore and coal, setting a precedent that other States may follow. This increase is expected to have a minimal impact on steel entities' operating margins, reducing them by around 30-40 basis points. Even if other states adopt similar measures, the overall impact is likely to remain modest.
"While most States haven't set the rates yet, any substantial cess implemented could adversely impact margins, especially for secondary steel producers, as merchant miners are expected to pass on the increased costs," said Girishkumar Kadam, senior vice-president and group head, corporate sector ratings, ICRA.
"The Supreme Court's provision for staggered payments over 12 years, starting from April 1, 2026, without any interest and penalties on past demands, offers some financial relief," Kadam added.