India reaps royalties

The Indian cabinet’s approval of increased royalty rates on minerals including iron ore, copper and bauxite yesterday will raise costs for miners and metal producers, analysts and company officials said.

The royalty on iron ore will be increased to 15% of sales from 10%, while bauxite, used to make alumina and aluminum will attract 0.6% royalty from 0.5%, according to government documents obtained by Bloomberg News. The tax on copper will go up to 4.62% from 4.2%. The revised rates will take effect after the federal government notifies the changes, said R.K. Sharma, secretary general at Federation of Indian Mineral Industries.

An increase in fees will lead to a higher mining costs and may force metal producers, including Steel Authority of India Ltd., Tata Steel Ltd. and NMDC Ltd., to pass on the burden to consumers.

“Steel companies are already severely impacted because of ore shortages and the rupee’s depreciation in the past three months,” said Seshagiri Rao, group chief financial officer at Mumbai-based JSW Steel Ltd. “Royalty will add to the cost burden.”

The additional royalty on iron ore will lead to a cost increase of 250 rupees ($4) a metric ton for the steelmaker, Rao said. The company will decide on whether to pass on the cost at the end of the month, he said.

Steel Authority led a decline among metal producers today, falling 3.2% to 83.90 rupees in Mumbai, while Tata Steel fell 1.6% to 536.60 rupees. Sesa Sterlite Ltd., India’s biggest zinc producer, dropped 1.8% to 289.85 rupees.

State Revenue

The higher royalty will raise the annual mining revenue of India’s states by 41% to 132.7 billion rupees from the year ended March 2012, according to a Press Information Bureau statement. The eastern state of Odisha is the biggest beneficiary and may get a third of royalty proceeds.

The royalty on limestone with less than 1.5% silica content will be raised to 90 rupees a ton from 72 rupees, while other grades of the cement-making material will attract a tax of 80 rupees a ton from 63 rupees now. The rate on zinc ore will be revised to 9.5% of the value of the metal content from 8% now, while concentrates will be levied a 10% royalty from 8.4% now. The rates were last revised five years ago.

“Increase in royalty on zinc and lead will have a direct impact on Hindustan Zinc and in turn on parent Sesa Sterlite,” said Goutam Chakraborty, an analyst at Mumbai-based Emkay Global Financial Services. “There will be an impact on steelmakers, those with their own iron ore sources and those that buy it from others.”