This development is intended to compress operating margins across the sector, affecting both primary and secondary steel producers, Icra said in a note.
While the margins of the primary steel producers could be reduced by between 60 and 180 basis points, secondary producers could face a more severe impact, with margins declining by between 80 and 250 basis points, according to various scenarios in which tax rates could vary between 5 and 15 percent.
The power sector, which is heavily dependent on coal, could see a rise in supply costs of 0.6 to 1.5 percent, which could lead to higher retail tariffs. In addition, primary aluminium producers will also be affected due to their high energy consumption.
“Implementation of the new mining tax by major mineral-rich states may increase cost pressures for the steel industry. While most states are yet to set the rates, any substantial tax implemented could negatively impact margins, especially for secondary steel producers, as merchant miners are expected to pass on the higher costs,” said Girishkumar Kadam, Senior Vice President and Head, Corporate Sector Ratings Group, Icra.
According to Icra, the recent Supreme Court judgment has again brought into focus the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED), which allows a 15% tax on iron ore and coal. If fully implemented, it could lead to an 11% increase in landed costs of iron ore, directly impacting the cost competitiveness of domestic steel companies. In a related move, the Jharkhand government recently imposed a Rs 100 per tonne increase on iron ore and coal, setting a precedent that other states could follow. This increase is expected to have minimal impact on steel companies’ operating margins, reducing them by 30-40 basis points.
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