For the mining sector, 2019 will go down as ‘the year of epiphany’.
Earlier in 2019, the government unveiled the forward-looking National Mineral Policy. One can only hope that future legislation will carry forward its spirit.
This year finally saw some coal blocks getting successfully auctioned after the false starts during the last couple of years. This sets the stage for the auction of commercial coal blocks from 2020.
However, 2019 also showed the pitfalls that hide within our policies, acts and rules. A state government cancelled a PSU’s lease earlier, invoking a certain ambivalent word in the MMDR (Amendment) Act, 2015.
While the central government amended the problematic clause, this should not have happened in the first place. One of the most important mining-law changes brought about by the government in 2015 set the stage for expiry of mining leases in 2020.
Odisha is the theatre in which this will play out in 2020. The auctions will be hyper-competitive. We saw a record number of bids recently, with some players submitting multiple bids, which led to cancellation of the process.
The market structure of Odisha iron ore market is all set to change in favour of captive players who have a higher headroom to pay. Merchant miners will get marginalized. This is in stark contrast to coal which is moving in the direction of commercial mining and for good reason.
The success of getting these mines quickly into production would be the acid test of the mining sector reforms unleashed in 2015.
In the short run, it will be revealed whether the ‘expiry clause’ was a piece of overzealous regulation or a well-judged one. In the long run, it remains to be seen whether the raw material advantage of the eastern states, sustains in the face of aggressive bidding in an environment of supply insecurity.
One wonders whether the mineral-rich states realize in the first place that unbridled aggression in the auction can potentially have the same effect as the ill-conceived freight equalization policy of the past. Coal and iron ore would be prime casualties.
Even before we know it, imports would become competitive in the high growth coastal states and local production would plummet. We saw this getting played out in 2018-19 when primary aluminium’s growth in India was impacted significantly by aluminium-scrap imports.
For individual companies, 2019 will prove to be the inflection point for rediscovery. A large steel maker which used to buy 100 percent of iron ore from the merchant miners, has embarked on the path to becoming a captive miner ever since Category C mines were auctioned in Karnataka.
In 2019, it extended its dominance in Karnataka and is looking to establish its mining presence in Odisha. A large coal mining contractor is exploring iron ore. Hit by Goan lease cancellations, some players are looking to get a sizable Odisha footprint.
A global steel firm’s entry into India through acquisitions of an ‘IBC’ asset will be interesting as it is one of the few global steel players who prefer captive mines over merchant supply.
Existing players, especially public sector miners continue to struggle with regulatory, legal, land and clearance related issues that delay mine operationalization and capacity expansion.
This has resulted in them not being able to meet their targets. On the other hand, a greater degree of nationalization is visible around the country. For instance, greater state-control over sand mining is clearly visible in multiple states.
A large number of coal mines have been allocated to coal PSUs and other state mineral development corporations (SMDCs) for development. While this step will provide an avenue to the state to get some additional revenue, some of these SMDCs may not have the bandwidth to develop mines unless they augment their institutional capacity sufficiently.
Auction of minor mineral blocks is progressing at a fair pace, especially in some states like Gujarat and Chhattisgarh. Several other mineral rich states are yet to show an equivalent amount of movement on this account even though they have potential reserves. Given that tax revenues are not healthy this year, these states should work towards maximizing other sources of revenues, such as from minerals.
Globally, coal prices reduced by over 30 percent in the last twelve months amidst general support for renewables. Financiers seems to be withdrawing from the fossil fuel. Iron ore price rallied till July and then lost steam as the US-China trade rhetoric picked up pace. Hopefully, with the US-China trade deal done, the price will rally. Overall, 2019 wasn’t a great year for metals. Given that regulations and policy in the energy and mineral space is still evolving in India and clearance related challenges exist, it is unlikely that global miners would be attracted to invest in Indiaany time soon.
The biggest NCLT case negotiated various legal challenges and finally got resolved in the closing months of 2019.
However, several smaller steel players continue to remain stressed and amidst their respective resolution process, either within or outside NCLT.
The weakening of the auto and construction sector demand will only delay these companies from turning a corner.This clouds the outlook for the mineral sector in India. Broadly speaking, 2019 provided one last window of opportunity before the transition of 2020.
In a few months from now we will know whether 2019 was well utilised by the government and companies alike, to prepare for the challenge ahead. Otherwise, one can only hope that the Government takes corrective action – like it did by amending IBC or mining laws in the recent past.The author is Partner, Mining and Metals, KPMG in India