KOLKATA (miningweekly.com) – Faced with an economic downturn and crippling debt burden, Indian steel producers have complained over being forced to contribute to District Mineral Funds (DMFs) for mining iron-ore for captive consumption.

The notification formalising the establishment of DMFs at every local mining site has listed steel producers with captive mines among the miners that would have to contribute financially towards the development of the local populace.

The DMF contribution was mandatory for all iron-ore mining leases granted after January this year, irrespective of whether iron-ore was mined for captive consumption or merchant sale.

The notification stipulated a mandatory payment equivalent to 30% for mines allocated before January this year and 10% for those granted thereafter. But practically all steel companies in the country would be liable to pay the higher rate as they sourced ore from captive mines granted long before January.

According to a Steel Authority of India Limited (SAIL) Raw Materials Division (RMD) official, all iron-ore captive miners were heavily invested in large downstream value-added production facilities and the high DMF levy disincentivised value, as the same rate applied to captive and merchant mining.

SAIL RMD operated seven captive iron-ore mines with combined rated production capacity of 18-million tons a year to supply SAIL’s five steel mills.

The official pointed out that cheap access to iron-ore was the biggest competitive element for domestic steel mills and the DMF contribution would seriously erode pricing power for the steel producers at a time when cheap steel imports were flooding the domestic market.

While local steel mills were largely dependent on imported coking coal, flat steel products were being imported at about $300/t for ex-China shipments, while local steel mills’ pricing for flat products averaged around $500/t.

Given such price differentials, making captive miners contribute to DMFs would further erode the financial position of local steel producers, the official argued.

A Financial Stability Report of the Reserve Bank of India recently noted that five of the largest domestic steel companies could be classified as “under severe financial stress”.

The report showed that, of the $50-billion of bank loans extended to the Indian steel industry, as much as $30-billion had been classified as “stressed and carrying risk of default within the next two financial years”.

An Indian Steel Alliance official said steel companies’ finances were already stretched and that the companies were in no position to bear the burden of revenue outflow on account of captive mining. He added that the government had failed to take note of the current downturn in the domestic and international steel industry when imposing the DMF levy.

He further noted that the skewed royalties payable by miners were resulting in higher DMF contributions.

For example, in the eastern Indian province of Odisha, the government was levying the highest rate of royalty even for the lowest grades of iron-ore and, as the DMF rate was linked to royalties, this was having a spiralling impact on steel companies’ costs.