Where SAIL's profits come from

State-owned steel giant’s profits are increasingly from raw material subsidies, not real economic value addition

 
By Umashankar S, Ishikaa Sharma
Published: Thursday 17 September 2015

sailAs the debate over the methodology of allocating natural resources continues, the Planning Commission, in a note dated October 21, has questioned the Union coal ministry’s position of giving free coal mines to even state-owned entities.

“The terms and conditions given are not clear on the process of auction for Government companies. It needs to be clarified whether methodology used to determine reserve price of the coal resource for private companies is also applicable for the government firms. If so, then how this process will be different from the process adopted for private companies,” a senior Planning Commission official informed a news agency.

Meanwhile, a recent assessment of the steel sector by Centre for Science and Environment (CSE), a Delhi non-profit, found that state-owned firms which were granted free or significantly discounted resources performed poorly on the environmental front as well.

The findings under CSE’s Green Rating Project study was observed for Steel Authority of India Limited (SAIL)—a state-owned steel producer with several significantly discounted iron ore mines under its belt.

“One of the reasons of poor green performance of SAIL is because of the leeway or advantage provided by the cheap iron ore, allowing the factories to continue to operate sub-optimally with inadequate maintenance, thereby causing high pollution levels,” says a senior researcher from CSE.

CSE found the extent of financial benefit gained by SAIL from differential price of iron ore (market price of ore minus cost of iron ore incurred by company) was a whopping 70 percent of its operating profit in recent years (see table, 'Cheap iron ore brings in the moolah').

Cheap iron ore brings in the moolah

Parameter Units
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Value of Iron ore consumed In Rs crores
1,488.31
1,725.38
1,791.95
1,844.36
2,337.79
2,667
Volume consumed Million tonnes
24.65
25.44
23.28
23.24
23.07
22.00
Iron ore mined cost for SAIL Rs./ tonne
603.7
678.1
769.7
793.5
1,013.3
1,212.3
Average market price of iron ore for the year for NMDC ore* Rs./ tonne
1,629.9
2,024.6
2,855.7
2,583.1
4,287.7
4,104.2
Average market price of iron ore assuming 10% lower value of SAIL ore to NMDC due to slightly poor quality Rs./ tonne
1,466.1
1,822.1
2,570.2
2,324.8
3,859.0
3,693.8
Difference between market price and SAIL cost for iron ore Rs./ tonne
862.4
1,144.0
1,800.5
1,531.2
2,845.6
2,481.6
Differential value in iron ore costing due to captive mines   Rs. Crores
2,126.1
2,910.8
4,191.8
3,558.9
6,564.8
5,459.4
Operating profit stated Rs. Crores
10,966
12,955
10,946
11,871
9,030
7,658
Share of differential iron ore value as operating profit Percentage
19%
22%
38%
30%
73%
71.3%
Net profit Rs. Crores
6,202
7,537
6,170
6,754
4,905
3,543
Ratio of differential value of iron ore as net profit Percentage
34%
39%
68%
53%
134%
154%
Source: Analysis of SAIL Annual Reports and financial statements, Centre for Science and Environment, Delhi
* Source: NMDC ore price as per letter dated 25 Jan 2012 by Chief Minister, Odisha to Union minister of mines,
http://www.orissaminerals.gov.in/Download/DO-CM-reg-mineral-resource-rent-tax.pdf
(as viewed on November 5, 2012)



In other words, had the government just sold iron ore in the open market (like it does through other state-owned firm NMDC Limited), it would have earned a revenue of say Rs 5,459 crore in 2011-12, which is equivalent to almost 70 percent of SAIL’s operating profit for that year. This needs to be compared with SAIL’s annual dividend (payout) to government—it was only Rs 700 crore in 2011-12.

CSE study, thus, finds that government is increasingly grandfathering SAIL.

“Availability of raw materials, particularly iron ore from captive mines, at a much lower price for SAIL plants could be one of the reasons for comparatively less efficient use of the same, resulting in higher levels of pollution”, said Ashok Ghose, a steel industry veteran.

Ignorant of these apparent fallacies, the Indian government continued to freely hand over to SAIL the Rowghat mines in 2009.

Maharatna tag questioned

Given these facts and accounting insights, even the ‘Maharatna’ tag of SAIL needs to be questioned. The tag granted by the Government of India through its Department of Public Enterprises (DPE) is for state-owned entities with certain eligibility criteria, and allows greater financial and operational autonomy in decision making. Among other criteria, a company should meet average annual net profit of over Rs 5,000 crore during the last three years for being granted the tag.

However, as per the CSE study, SAIL’s profits were found to be artificially inflated by government (read citizens) subsidy of iron ore.

“In fact, with its current state of affairs and even with all the cheap iron ore, it may lose its Maharatna status if it continues to underperform in financial year 2012-13 as the average net profit for three years is expected to slip below Rs 5,000 crore (see table)”, says the senior researcher at CSE

Read full research report: The other side of SAIL's profits (.pdf)

 

 

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