Revisiting the Mining Sector in the Wake of Covid-19
The COVID-19, Coronavirus pandemic has had a significant impact globally and has led to a force majeure situation impacting stocks and markets across developed and emerging economies.
Not only will this pandemic test the resilience of our economy but will also test our ability to innovate within the constraints of time and resources. Numerous small and big decisions which capture our intrinsic value, decisions which are rare, hard to imitate, and leverage organizational strength, will enable us to overcome the challenges posed by this pandemic.
The Mining sector (or the larger Mining & Metals consideration set) due to the very virtue of its criticality to the sustenance of the mankind and multidimensional applications will form the cornerstone of our efforts to neutralize the threat and capitalize on new opportunities. The changing market & operational dynamics due to rapidly evolving supply-demand scenarios, social distancing norms, dip in working capital etc. necessitate extensive mining reforms to overcome this situation and turbocharge the economy.
First things first, we need to alter the alter the mining product mix basket. Traditionally, the focus has been on ROM ore but now we need to shift focus towards value-added mining products. For e.g. in case of Iron Ore market which is oversupplied, causing price volatility, at the higher-quality end supplies are tight. Smaller blast furnaces are being phased out and new larger furnaces are being built, which require low-impurity high quality ores to ensure optimum productivity. There is an opportunity to place significantly greater emphasis on higher-value products, including pellets and ore blends, which today command healthy premiums to the volatile spot market price. Presently, the capacity utilisation on Indian Pelletisation sector is below 70 % and at the same time the inventory stock of fines and ultra-fines is in excess of 100 Million Tonnes at pit head. This provides us with an opportunity to leverage the idle capacity of our pelletisation sector that will not only enhance the exports of value-added ores and capture the market premium but will also, enhance the productivity of downstream Iron Making processes, lower the coke rate of blast furnaces and reduce our coking coal import bill. It is estimated that this will also help in significantly reducing scope-I&II CO2 emissions attributable to the mining sector owing to lesser mining, adoption of slurry transport, higher energy efficiency when compared to other agglomeration processes and reduce carbon consumption in downstream iron making processes. In order to achieve this, we should provide input support for raw materials & utilities for pelletisation units, remove export duty on pellets, and enable laying of slurry pipelines alongside railway tracks to ensure the safety of pipelines as most of the mining zones are located in LWE affected hinterland areas thus posing threat to slurry pipeline transport.
We need to explore all plausible avenues to enhance the revenue stream to the Government in this time of economic turmoil. Thus, it would be prudent to move swiftly on disinvestment of Mining & Metal PSUs on the lines of BALCO, HZL etc. This will enable additional revenue stream for the government and ensure value maximization for Govt’s equity. The government should disinvest to become a minority stakeholder so that it gets out of day to day operations but at the same time reaps benefits of earnings in the long term though substantial shareholding. Example: Hindustan Zinc has shown multi-fold growth since disinvestment – 3x growth in mined metal, 3.5x growth in ore production and an EBITDA CAGR of 28%. At the same time, it has leveraged use of new technologies, explored new resources and adopted best practices such as JORC standard.
In order to enhance the economic viability of mining projects it would be prudent to rationalize taxes across the value chain. Revisit the tax rates to make them at par with global mining economies: To increase attractiveness for mining in India. Possible interventions include (i) implementing a unified tax rate (like GST) for mining industry capped at 40%, (ii) subsuming DMF (District Mineral Foundation) and NMET (National Mineral Exploration Trust) in royalty, e.g., Peru sets up funds for social welfare from the royalties itself, (iii) benchmark royalty on key minerals with other countries, e.g., India attracts 15% royalty on iron ore while it is 5-7% in Australia, 2% Brazil and less than 4% inChina, (iv) reducing import duty on equipment / latest technology which leads to increased productivity of operations for the mining player. Also, mining is a human intensive industry, it is of paramount importance to ensure the safety of miners and follow the social distancing norms. Thus, it would be prudent to temporarily reduce some of the business/financial obligations on the Mining companies so as to free up additional funds for the companies to fight the COVID menace, reduce the operational hazards and ensure the safety of miners.
This is a time to put in all plausible efforts to reduce our import bill attributable to the mining & metals sector. Case in point could be huge coking coal imports presently estimated @ ~ 10 billion $ ( 2% of our overall import bill). India has deposits of around 33 Billion Tonnes of Coking Coal, of which 18 Billion tonnes belong to the LVC ( Low Volatile Coking) category having 30-50 % ash content. Although these coals have complex washing characteristic, they can be washed to bring down the ash level to ≤18% and blend with prime coking coals for producing metallurgical coke. Several pilot studies were done in the country by institutes such as the Central Fuel Research Institute (CFRI) have proved this theory. While the production of coking coal has increased significantly over the years, the proportion suitable for metallurgical purposes has remained stagnant or has come down in the last 2 decades. Rest of the coking coal production, which could have been produced by the domestic steel industry is being sold to power plants. This practice has no rational when the domestic steel sector is facing crunch of this key material and the country has ample reserves of thermal/non-coking coal to meet its power demand. Also, public sector companies should shed their inertia and step up the learning curve. The blend ratio of imported coking coal for PSU units is in the range of ~ 85-90% on average while that for top-performing private sector units is ~ 50 %. Adopting best practices would not only improve the bottom line for PSUs but also bring down the import bill of the country.
We also need to examine this from a VUCA ( Volatility, Uncertainty, Complexity, Ambiguity) perspective and effectively safeguard our future. We should have an effective trade policy for minerals to enable us to be nimble footed and capture on spot market volatility while at the same time ensure uninterrupted supplies for domestic industry. Going forward we would have a huge requirement of rare earth and technology minerals for our strategic needs. With the expected increase in demand for energy-critical, deep-seated and technology rare minerals such as Lithium and Cobalt, India needs to shift focus to explore and mine these minerals. A key intervention in the short term would be to acquire assets overseas like ONGC Videsh which has acquired oil and gas assets outside India. Countries such as Chile, Bolivia (highest Li reserves in the world) and Argentina can be roped in as potential partners. In the long term, policy intervention is required to declare crucial minor minerals of national importance and drive a central policy to ensure uniformity across exploration and mining in different states.
Further, we need to make our financial institutions more aggressive. The ongoing pandemic will create more stressed assets/NPAs in the times to come particularly in the extended mining and manufacturing sector. Thus, it would be prudent to opt for aggressive instruments such as debt-equity swap for select companies that are stressed but have a strong growth potential and important for our strategic needs in order to ensure sustained economic growth and systematically deleverage state-owned firms.
*Shantanu Rai is Consultant, NITI Aayog. Views expressed are personal.
 Such as the rally in Iron Ore prices due to the Vale dam disaster in H1 2019 but we were not able to leverage the opportunity even though we had an inventory of 162 Million Tonnes at pit head.