For any large developing economy, the state of its metals and mining industry is of great significance, given the immense positive externalities the industry holds for infrastructure, engineering and other core sectors. As economic growth follows an S-curve, the initial stage of this growth needs to be led by investments in the core sectors, which in turn must be supported by a robust metals and mining sector. Despite decades of economic growth, India remains at the initial stage of that curve.
Compared to countries like the US, Japan and China, India languishes at a low level of both per capita income as well as per capita metal consumption. For example, current per capita consumption of steel in India at around 40 kg pa is substantially lower than in the US, China (around 300 kg pa) and Japan (in excess of 600 kg pa). On the negative side, the low figures are largely indicative of the country?s costly omissions, over the past decades, in making investments in end-user sectors, principally infrastructure. However, on the positive side, one could smile at the tremendous growth opportunity that India presents as a market for the future. Especially given the renewed thrust of the government on infrastructure and a robust domestic industry, prominent participants of which are now reckoned as major global players.
The Indian metals industry has been an old and long-serving warhorse for the country?s economy. However, it was only during the last decade that it developed a significant stride and a more confident gallop, reinvigorated largely by the windfalls gained on account of the sharp spurt in global metal prices, primarily led by China. The high prices were supported, in turn, by the high growth rates witnessed by the major end-user sectors. This was a consequence of economic reforms effected through the 1990s, which ensured space for the growth ambitions of various industry participants. The Indian industry not only came into its own during the last decade, but also forayed out into the world, with some of the larger players acquiring global majors in developed countries, often significantly larger in size. At the fag end of the decade, the Indian industry was tested severely by the global slowdown that followed the financial meltdown. The impact was undoubtedly significant, greater than the recessions of previous decades, given that the Indian industry is more globalised now (with lower tariff and non-tariff barriers). However, it was able to recover more quickly than its international compatriots and resume its growth trajectory.
Nonetheless, concerns remain for the future. The recovery was in large part due to the rapid pickup in worldwide prices in the first half of CY2009 after they bottomed out in late-2008, on account of China?s programme of importing and stockpiling metals to fuel its growth. The greater part of Chinese economic growth during CY2009 is attributed to the Chinese government?s 4 trillion renminbi stimulus programme. How long the effects of the stimulus, including on the metal prices, will last in the future remains uncertain. On the other hand, prices of some valuable inputs, which are scarce in India, are expected to go up sharply. Coking coal prices are expected to soar in the current year; China?s steelmakers starved of quality coking coal from domestic mines are expected to raise imports. Consequently, while growth in domestic end-user sectors may sustain a growth in volume, prices and margins may continue to be determined by global movements.
The security of raw materials will continue to remain the key success factor for any player in the metals industry. For minerals like coking coal, industry participants will have to look to acquire assets outside the country. On the other hand, quality assets with adequate reserves and viable grades may be hard to come by. Even for minerals available in India, securing mineral assets could mean confronting myriad issues.
India is well-endowed with an enviable mineral wealth made up of as many as 86 minerals, including four fuels, 10 metallic, 46 non-metallic, three atomic and 23 minor minerals. The country boasts of the fifth largest reserves in iron ore, fourth largest in bauxite, third largest in chromium and second largest in manganese. Besides, its assets in bauxite and iron ore count among the world?s best, in terms of quality. But the exploitation of resources has been rather inadequate, with only 10% of India?s land mass having been explored for minerals. Historically speaking, the principal reasons for the same have been the lack of a streamlined approach from central and state governments, extensive bureaucratic wrangles and ambiguity regarding a universally applicable land acquisition policy. In addition, the legacy of restrictions on private participation in the sector has resulted in the proliferation of small-scale miners unable to afford modern, large-scale mining equipment. Mineral prospecting lends itself to significant uncertainties and, therefore, remains out of the reach of small private players.
Restrictions on large deep-pocket investors meant the activity remained the sole domain of the public sector.
In March 2008, the Government of India, in an effort to set right these issues, announced its National Mineral Policy. Here it articulated, inter alia, the adoption of quick and transparent procedures for granting mineral concessions, encouragement for the participation of the private sector and foreign equity investments (in joint venture with Indian companies) for exploration and mining, facilitation of access to risk funds from capital markets and venture funds for prospecting, and creation of an independent Mining Appellate Tribunal. The policy is yet to be implemented as an amendment to the primary legislation?Minerals Development and Regulation Act, 1957. However, it has triggered off further policy initiatives?the Model State Mineral Policy, 2010 and the Modified Draft Mines and Minerals Act, 2009?that seek to improve transparency in giving licences for prospecting and streamlining the awarding of mining leases.
While the government?s initiatives are in the right direction, as far as improving transparency is concerned, their fruition may require the government to take some hard decisions. The government?s ultimate objective should be to evolve a system where it would have relinquished its role of allocating mineral assets and the pricing of mineral assets would be determined entirely by the market. On the other hand, the government would be required to play a more active role as a facilitator in managing diverse constituencies?often having contrary interests?through a consensual approach. The first of the major contradictions, in need of management, is that around 60% of the 50 mineral-rich districts of the country are located in the country?s most underdeveloped areas. Second, while large-scale mechanised mining would seem an imperative for competitiveness, mining activity in most places has been largely labour-intensive, given the deprivation in the mining regions. Third, a major part of India?s mineral wealth not being tapped may be attributed to a large extent to most of the area being under forest cover on which local communities and tribals are dependent for livelihood.
The government, until now, has been considering community interests and local welfare constraints. In the future, these would need to be incorporated more integrally into its overall policy. The government would be required to develop a keener understanding of local sensitivities, facilitate community participation in decisions on land transfers, ensure fairness in distribution of proceeds and adherence to prescribed norms of sustainable development.
The Indian metals industry seems to have finally come of age. Even though, it may continue to be swayed by global upheavals, it is expected to be able to withstand them with some adjustments. However, the upstream mining sector continues to be in a state of disarray, stuck with myriad issues that that have festered for too long, preventing the metal industry from sufficiently benefiting from the country?s abundant mineral resources. It remains for the government to find a way out of this impasse, demonstrating transparency in pricing and transfer of mineral assets while ensuring accommodation of structural and ecological interests by all parties with adequate sensitivity.
The author is MD and CEO of CARE Ratings