The decision of the Supreme Court to allow the states to impose additional mining cess is likely to drive up input costs and compress the operating margins across the value chain. According to the report by Icra, the SC’s ruling is expected to impact several sectors such as steel, aluminium and power and the steel sector is going to have the biggest impact.
Icra has expected a decline of 60 to 180 basis points (bps) for the primary steel producers. Taking into consideration, the cess of 5 to 15 per cent on iron ore, based on current prices, the rating agency has projected a decline of 80 to 250 basis points for the secondary producers.
The top court states that have enacted laws earlier to impose such cess, can apply it retrospectively. Even though it will only impact the transactions that took place after 1 April 2005, the mining companies are going to have sizeable liabilities, as stated by Icra. The payments have to be made over the next 12 years, beginning from 1 April 2026.
Icra has highlighted that the primary aluminium producers are going to witness a marginal decline of 50 to 60 basis points, after taking 5 to 15 per cent cess into consideration. As far as the Power sector is concerned, the agency has stated that there is likely to be an increase in the cost of supply for the state distribution utilities which could go up by 0.6 to 1.5 per cent, considering a cess of Rs 75 to 175 per MT. This could also lead to upward pressure on retail tariffs.
“The SC ruling has a renewed focus on the Orissa Rural Infrastructure and Socio-Economic Development Ac, 2004 (ORISED), which proposed a 15 per cent cess on iron ore and coal. Such imposition could raise the landed cost of iron ore in Odisha by 11 per cent, thereby increasing crude steel input costs by Rs 1,200 per tonne.”
The report also noted that Jharkhand’s recent regulation imposes a minimal cess of Rs 100 per tonne on iron ore and coal, which could lead to a low impact on the operating margins of steel entities.
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