Impact of Union Budget on Metals & Mining Sector in India

The newly formed government of India has presented its first Budget for the financial year 2014-15 amidst huge expectations from individuals and industry. The Budget was presented at a time when the economic growth has faltered to the low of 4.7% in FY13-14 and all corners of the country have been struggling to find a way to get back to 8% plus growth trajectory and shrug off the policy inertia. Under this circumstance, Geovale analyses the impact of Budget announcements on minerals and mining sectors in India.

Coal

In a surprise move that the custom duty on coking coal and met coke has been raised from 0% earlier to 2.5%, while that on steam coal and bituminous coal is raised from earlier 2% to 2.5%. The countervailing duty has been standardized at 2% for all types of coal.

Also the rate of clean energy cess on production and import of coal, lignite and peat increased from INR50/t to INR100/t.

 Impact

Although the government of India claims to have aligned duty rates of various types of coals by rationalizing BCD and CVD to avoid ambiguity, the decision is likely to have some negative effect on Indian steel, power and other coal consuming industries. As India is highly dependent on import of coking coal (around 85% of coking coal consumed in India is imported) the hike in import duty in coking coal will raise the cost of production for the integrated steel producers like SAIL, JSW Steel, Tata Steel etc. The ferro alloy producers along with the steel mills are like to be hit by increase in import duty on met coke as they have to be dependent on low phosphorous met coke through imports.

Cost of power generation will be marginally increased due to rise in BCD in steam and bituminous coal as well as hike in clean energy cess.

 Iron Ore

Although there had been demand from the miners to reduce the export duty on iron ore and to increase the export duty by steel makers, this budget did not make any alteration in the import and export duty structure on any form of iron ore.

However, an investment based incentive (deduction in respect of the eligible capital expenditure) has been proposed to be provided for ‘laying and operating a slurry pipeline for the transportation of iron ore’ from 1^st April 2014. This is likely to benefit companies like NMDC who is planning to install a 150 km long slurry pipeline from Bacheli to Nagarnar in Chhattisgarh. We feel this innovative environmental friendly step will reduce the logistics cost by more than 50% and reduce dependence on road/ rail infrastructure.

Bauxite

In order to improve supply of bauxite ore to the domestic aluminium producers the Finance Minister has doubled the export duty on bauxite ore from 10% to 20%. The local aluminum producers have been facing a shortage of the raw material because of mining curbs.

Geovale does not see this move as a big benefit the domestic aluminium producers because India generally exports non-metallurgical grade bauxite. This is mainly refractory grade bauxite which is exported through Gujarat and Maharashtra mainly to China and generally not used for producing alumina.

Steel

The BCD on flat-rolled stainless steel products has been increased to 7.5% from 5% in order to give impetus to the domestic stainless steel sector which is facing fierce competition from China, Japan and Korea. BCD on ship breaking scrap and melting scrap of iron or steel has also been reduced from 5% to 2.5% for ships imported for breaking up. The steel industry is also expected to benefit from reduction in import duty on dolomite from 5% to 2.5%.

The Budget has given impetus to improve steel demand which has come down to just 0.6% in FY13-14 from 6.8% achieved in FY11-12 from various infrastructure projects. The following announcements are positive for steel demand in India.

• Incentives for Real Estate Investment Trusts (REITS) and Infrastructure Investment Trusts (INVITS)
• Allocation of INR70.6 bn for 100 smart cities INR40 bn for affordable housing for the urban poor.
• Increase in deduction limit in interest payment from INR1.5 lacs to INR2 lacs on home loan.
• Inclusion of slum development in the list of Corporate Social Responsibility.
• Various incentives given to power sector.

However, the steel producers particularly those who are following blast furnace route are likely to face an increase in cost of production from the imposition of 2.5% custom duty on coking coal.

Mining

Nothing concrete has been announced for the revival of the ailing mining sector in India which has been facing negative growth for the last two years.

• To encourage investment in mining sector and promote sustainable mining practices, changes will be introduced in MMDR Act, 1957 if necessary.
• Royalty rates would be revised so that state governments get a larger share of revenue.
• The current impasse in mining sector, including, iron ore mining, will be resolved expeditiously.

Geovale views this budget as more of directional in nature rather that definitive given the fact that it has been presented within 45 days of the formation of new government. From the policy measures it is apparent that the government wants to have a balance between increasing its earnings to improve fiscal deficit situation and improving the operating environment of the industries through safeguarding, cost saving and reviving domestic consumption.