Why the Vedanta chief said India’s iron ore industry is ‘dying’ — and why the govt disagrees

He argued that although the government introduced the auction regime to increase transparency in mining, the limited number of blocks on offer, coupled with competition from steel manufacturers, is creating a ‘huge demand-supply mismatch,’ driving bids sky-high. “The bid is based on how much revenue you will share with the government. Since auctions were introduced, the average for iron ore is 118%,” Agarwal claimed.

Roughly twelve hours later, the mines ministry dismissed Agarwal’s remarks as “completely misleading”. “No mining company in India shares 100% of company revenue with the Government,” its official X account said.

The post clarified that auction bids determine the monthly premium a company pays to the state government as a percentage of the average ex-mine price of iron ore, excluding expenditure on logistics and on value addition for steel production. “Auction premium is not paid out of total revenue of the company,” the ministry said.

Auction premiums surge

While the ministry correctly pointed out that auction premiums are applied to the average ex-mine price of iron ore, not a mining company’s total revenue, premiums for blocks auctioned since 2016 have risen sharply. High auction premiums strain profit margins, especially for mining companies not integrated with downstream value chains.

Since the Mines and Minerals (Development and Regulation) Amendment Act, 2015 introduced the auction regime, 121 iron ore blocks have been auctioned across India. Of these, 35 blocks requiring further exploration were awarded under composite licences (CL).

For the remaining 86 blocks awarded under mining leases (ML), the average auction premium stands at 119 per cent, according to an analysis of official auction data by The Indian Express. This figure has surged over the years—from 86 per cent for the first eight blocks auctioned in 2016 to a whopping 171 per cent for the most recent 16 blocks auctioned in 2023.

Blocks on offer have grown

In response to Agarwal’s claim of a demand-supply mismatch due to limited auctioned blocks driving up premiums, the mines ministry countered that 17 blocks are currently under auction, with 60 more handed over to state governments. “It is therefore wrong to say that only limited blocks are on offer,” the post said.

Between 2020 to 2023, the ministry auctioned 97 iron ore blocks compared to 24 blocks in the preceding four years. In the four years prior to 2016, before the auction regime was introduced, only four blocks were allotted to mining companies. In 2024, however, no blocks have been auctioned yet.

Still, the number of available blocks has significantly increased under the auction regime. However, experts argue that offering even more blocks could help cool premiums, providing relief to smaller mining companies and those not integrated with downstream operations.

The ministry also noted that India’s iron ore production has risen from 129 million tonnes (MT) in FY15 to 274 MT in FY24. “India produced 144 million tonnes of steel in FY 2023-24 for which iron ore requirement was easily met and additionally 46 million tonnes of iron ore was exported by India. Thus, there is no shortage of iron ore in the country to support the iron and steel production,” it added.

Hurts non-captive mines

A 2023 market study by the Competition Commission of India (CCI) found that the share of captive mines in the total number of iron ore mines has risen over the years. Steel manufacturers with captive mines can absorb higher auction premiums through value addition, unlike companies operating non-captive mines.

“The contribution of iron ore in the cost of steel produced is about 15%. So, in case of a steel company which uses iron ore produced from its own mine, it pays only a small percentage of total value of steel produced as auction premium to secure assured supply of iron ore for running its steel plant,” the ministry said in its post.

In contrast, the rising auction premiums squeeze the margins of mining companies not integrated with steel plants or those focused on exports. In FY24, roughly 46 MT of iron ore was exported out of India, which is also the world’s fourth largest producer of the key commodity.

The ministry also rejected Agarwal’s recommendation for a 50 per cent cap on auction premiums, stating that “investment in iron ore blocks is low risk project and hence, there is no need to place any cap on iron ore revenue share”.

Competition concerns

The CCI study also highlighted that large-scale producers gaining control over the iron ore supply chain through captive mines can manage “fluctuations in raw material prices better”.

“This has created competition concerns due to differential cost structure amongst steel producers with and without captive mines. It is further observed that the iron ore blocks auctioned after 2015 are dominated by some companies like JSW, which accounts for nearly 47 percent of the total quantity of the reserves auctioned,” the study noted.

Of the 4,300 MT of iron ore reserves auctioned under ML since 2016, 35 per cent went to JSW Steel Ltd, 11 per cent to Jindal Steel and Power Ltd—both vertically integrated steel players. Rungta Mines Ltd and Tata Steel Ltd secured 9 per cent and 7 per cent, respectively, while Vedanta Ltd acquired only 94 MT, or about 2 per cent. The remaining 36 per cent of reserves were awarded to various other players, small and large.

Slow mine operationalisation

“Not surprisingly, most of the blocks have not been operationalised. Operating companies are even considering returning some of the blocks because of unviability,” Agarwal also said in his post.

In response, the mines ministry said 34 of the 119 auctioned iron ore blocks have been operationalised, less than 30 per cent. The ministry also expects another 21 blocks to become operational in the near future.

“It is incorrect to say that non-operationalisation of blocks is due to high auction premium committed by the bidders during auction. Operationalisation of the blocks requires obtaining various statutory clearances such as environment clearance, forest clearance, etc. and land acquisition which normally takes 3-7 years time after auction, depending on level of exploration of the block. Since, most of the blocks have been auctioned during the last 3 years, it will take another 2-5 years to operationalise these blocks,” the ministry said.