The enforcement of a new mining cess, or tax, by some states, following a Supreme Court ruling, may exacerbate cost pressures for the domestic steel industry, according to rating agency ICRA.
On August 14, the Supreme Court upheld states’ authority to levy taxes on mineral rights and mineral-bearing land, allowing them to seek royalty refunds from April 1, 2005.
This development is expected to compress operating margins across the steel sector, with primary producers facing a 60-180 basis point reduction and secondary producers a more significant 80-250 basis point decline, depending on cess rates ranging from 5-15pct. The power sector, reliant on coal, may see supply costs rise by 0.6-1.5pct, potentially leading to higher retail tariffs, while primary aluminium producers will also be affected due to high power consumption.
ICRA highlighted that if mineral-rich states implement substantial cess rates, it could further strain steel industry margins, especially for secondary producers, as merchant miners pass on increased costs. The Supreme Court ruling has also renewed attention on the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED), which permits a 15pct cess on iron ore and coal, potentially increasing landed costs of iron ore by 11pct and impacting the cost competitiveness of domestic steel producers.
