BMI View: India's inadequate operating environment will continue to hamper growth in the mining sector. Despite positive regulatory reforms, it is unlikely that the domestic coal deficit will be reduced anytime soon. India's new mining bill will generally improve mineral production by reopening previously closed mines and improve the operational certainty of miners. However, in an environment of lower prices, the additional costs that come along with the bill will dampen its impact on production.
While growing domestic demand for commodities will incentivise state-owned miners to expand production, we believe that India's poor operating environment will continue to restrict growth in the mining sector. A spate of bureaucratic and regulatory hurdles will remain major challenges for miners to grapple with over the coming quarters. For instance, the difficulties in land acquisition and the securing of environmental clearances have led to a series of mining projects being delayed over the past year. Vedanta Resources was forced to put its bauxite mining project in Odisha on hold due to fierce protests by the local community. A bright spot, however is Prime Minister Modi's passage of the Coal Mines (Special Provisions) Bill in March 2015 and reforms made to Coal India, which has helped to boost coal production.
We believe the Bharatiya Janata Party (BJP) will continue to implement positive reforms to revive economic growth over the medium term. The party's track record of pro-business dealings could bring about an improved operating climate in the mining sector.
Although India holds one of the world's largest coal reserves and has significant production growth potential, the country will continue to suffer from a persistent coal deficit over the coming years. Even though the government has made great progress in improving coal mine production and coal off-take, power shortages and strikes by coal unions highlight the need for the government to implement effective reforms. India's coal sector is rife with theft and corruption and hampered by primitive mining techniques. Additionally, significant amounts of coal deposits are located in protected forests or conflict-laden tribal lands, making it extremely difficult to increase production.
|Production To Remain Solid|
|India - Select Minerals Production (% chg y-o-y)|
|e/f = BMI estimate/forecast. Source: National Sources, BMI|
In terms of iron ore, following the end of an 18-month ban on iron ore mining in Goa on April 2014, in January 2015, an ordinance amendment was made to the Mines and Minerals (Development and Regulation) Act(MMDR) which will help increase iron ore production. The Ordinance was eventually passed in the form of a bill in March 2015. However, as prices of iron ore continue to remain low, we do not expect any significant rebound in production. Ironically, the MMDR bill has helped to quash the prospects for a rebound in production as it imposes greater costs on miners with additional contributions to certain state and government trusts.
India's mining sector is highly stratified. There are a number of giant, mostly state-owned mines that have an outsized impact on total output, in addition to a large number of small and inefficient mines operating illegally. According to Austrade, 5% of operating mines in India produce about 50% of the country's mineral output. Given the sector's economic importance, there is significant government involvement, with the sector dominated by state-owned companies or public sector undertakings (PSUs) such as National Aluminium Corp (NALCO), Steel Authority of India Ltd (SAIL), National Mineral Development Corp (NMDC) and Coal India. These four companies account for around 85% of India's total value of mineral production and are the main producers of key commodities including coal, iron ore, aluminium, copper and gold.