SC order to decide future of Rs 1L-crore mining projects

Written by Aveek Datta | Mumbai | Updated: Aug 27 2014, 07:02am hrs
Even as Prime Minister Narendra Modi asks business leaders to compile a list of hurdles that are in the way of spurring Indias economic growth, the state of flux in the mining sector threatens to singlehandedly derail Indias growth story.

Across sectors like metals, power and cement, capacity addition plans chalked out by public and private sector firms are contingent on availability of natural resources like iron ore, coal, bauxite, manganese and others.

The direction given to Indias mining sector in the next few days by lawmakers and the judiciary will decide the fate of projects entailing an aggregate investment of R80,000 crore to R1 lakh crore, under various stages of development.

According to an August 26 research note by JP Morgan, around 13,000 MW of capacity partially or wholly-dependent on captive coal blocks, which are under construction or partially operational will be affected by the Supreme Courts order. The apex court is to decide on September 1 if coal blocks allocated under a process that it found illegal should be taken back or not.

If the coal blocks are indeed de-allocated, it will lead to further dependence on imports and outgo of foreign exchange from the country.

We are expecting captive coal blocks supply to increase from 53 million tonnes per annum (mtpa) to 61 mtpa over FY14-16, says an August 25 report by UBS Securities. However, if SC (Supreme Court) goes for a blanket ban on production from these blocks, our coal imports estimates could be revised upwards by around 50 mtpa to 300 mtpa in FY16.

A Barclays report issued in May stated that the mining sectors contribution to Indias current account deficit stood at an all-time high of around 30% or $26 billion, even as its contribution to Indias gross domestic product is expected to have halved since 1994, to 2% in FY14.

Even if the court decides to levy a penalty and not withdraw captive mine linkages, it would be a massive burden on companies that have been fighting tooth-and-nail to deleverage their books by monetising assets and raising equity. For instance, in Odisha alone, the state government intends to levy an aggregate penalty of around R68,000 crore on a clutch of iron ore miners including Tata Steel and the Aditya Birla Groups Essel Mining.

Industry experts forecast that if captive mine linkages were withdrawn then the production costs of metals firms will significantly rise.

A BNP Paribas note states that for a company like Hindalco, significant long-term cost improvement potential to the tune of $300-400 per tonne of aluminium price at the Mahan and Aditya smelters from FY18 onwards would be undermined.