Higher Export Duty, Royalty to Hit Sesa Goa

Sesa Goa (Sesa Goa is India's largest producer and exporter of iron ore in the private sector), which last week acquired Bellary Steel and Alloys' (BSAL) assets for R220 crore, indicating value addition (steel plant) to be the primary reason to bid for BSAL's assets, might continue to have a bumpy ride ahead as the company is already reeling under the concerns of decline in volume growth. Though value addition to iron ore is on cards, the company's outlook looks challenging due to volume growth hurdles, say experts. Sesa Goa's mines in Orissa are not operational. Also, export ban persists in Karnataka, and Goa faces lack of clearances for additional volume growth.

"The ongoing cost headwinds in the form of increased royalty as well as higher export duty to 20% for both lumps (earlier 15%) and fines (earlier 5%) makes it increasingly difficult for export of iron ore. Additionally, the impending mining bill which proposes 26% of net profit sharing, if implemented, can also have a major impact on profitability going forward," said Prasad Baji, analyst with Edelweiss Research in his recent report.

Industry experts believe, Indian exporters, with only 10% of global seaborne trade in 2010, have limited ability to influence global iron ore prices and hence, will have to absorb the majority of hike in export duty. "Additional export duty is expected to contract Sesa's FY12 operating margins by 49%," said Bikash Bhalotia, an analyst with Pink Research in his report.

During the third quarter ended December 31, 2010, Sesa Goa saw its saleable iron ore production decline by 5% year on year to 5.29 mt with decrease in iron ore sales by 21% at 5.38 mt.

The decline in production and sales volume was primarily due to extended monsoons and restricted road transport timings in Goa, temporary state-wide export ban imposed by the Karnataka government in July 2010 and continued logistics constraints in Orissa, the company had said.

PK Mukherjee, CEO and MD of Sesa Goa had earlier told FE, "In the current fiscal, we will spend about R750 crore of the total R2,800 crore project capex, the rest will be spent in FY12 and partly in FY13 if required." The company plans to close FY13 with 40 mt capacity, he said.