Geonesis
(A G E M C O K AT I I N I T I AT I V E )
Indian Mining & Exploration Updates
VOLUME 1, ISSUE 8
JULY 2014
MINING: A COMPLETE OVERHAUL IS NEEDED
Mining contributes a miniscule 1.9% to the gross domestic product of
India. This belies India’s strong resource position in the world as among
the top five owners of coal, iron ore and bauxite. State-owned mining
companies account for 70% of the production by value, while the private
sector is relegated mostly to captive production with highly fragmented
holding. Outdated regulations, bureaucratic delays and a hyperactive
judiciary have laid low the hopes of this emerging sector. India’s iron
ore production has dropped from 230 million tonnes (mt) to a mere
140mt in 2013-14, while coal imports jumped to 171mt in 2013-14 from
60-70mt in 2009-10. Anil
Agarwal, chairman of the
world’s eighth largest
diversified mining company Vedanta Resources
Plc, has openly regretted
having made a $6 billion
investment in aluminium
plants in Odisha given its
struggle to get bauxite. In
fact, reverse foreign direct
investment has gained
momentum as companies
such as Adani, Jindal,
GVK and NMDC Ltd
have started buying overseas mining assets. A
complete overhaul is the
need of the hour. The
immediate starting point
is to revamp the Mines and Minerals (Regulation and Development)
Act, 1957. The previous government did attempt to do so but could not
take it to the logical conclusion and the amendment lapsed. We have to
move away from free allocation of resources to an auctioning process for
efficient use of resources, reduce crony capitalism and fast-track investment. To attract investment in exploration, the government needs to
bring in ‘open sky’ policy for reconnaissance permit, ensure seamless
transition from prospecting licence (PL) to mining lease (ML) and guarantee rights to sell and transfer PL and ML. Streamlining the tax structure and ensuring transparency is also extremely important for attracting investment. India boasts of the highest tax rate on iron ore today in
the world. A firm has to pay 10% of the sale price as royalty and 30% of
it as export tax. Even railway freight is around 30% of sale price. If this is
not enough, Karnataka has levied an additional 10% of the sale price as
local area development charge on iron miners. Now with 80% of sale
price gone, if a company makes any profit, it has to pay 33% income tax.
No wonder production has dipped by almost 40% in the past two years
while we continue to leave no stone unturned to kill the iron-ore mining
industry. If we squeeze these companies during a commodity bull cycle,
why should we even expect further investments in exploration and value-addition facilities? One positive step the government has already
taken is to move away from specific tonnage-based royalty to taxes
based on assessed value. Next, it put a cap on the maximum percentage
of taxes, which will go a long way in removing uncertainty. To make
the industry globally competitive, it is desirable to remove restrictive
trade practices. The domestic steel industry is clamouring about
preserving domestic iron ore lest we run out of the resource in the
future. India has 25 billion tonnes of iron ore reserves at a cut-off
grade of 55% iron content, or around 100 years of consumption. This
would double if the cut-off grade is reduced to, say, 30%. And all this
is based on some preliminary exploration done by government agencies like the Geological Survey of India. The situation appears similar
to what happened in
Australia
in
the
1960s. At that time it
was estimated that
Australia had only
400mt of iron ore
reserves and iron ore
export was banned.
Now after 50 years,
Australia
exports
almost 600mt of iron
ore per year and still
has 40 billion tonnes
left in reserves. India
is largely still an
untapped potential.
The large steel companies have benefited quite handsomely
over the last 10 years
due to access to cheap captive iron ore resource. It might make sense
to give captive resources to attract investments but this also breeds
inefficiency. Many steel companies have been sitting on large resources without developing them. Also, having access to large and
free resources has led to sub-optimal utilization of natural resources.
This is evident from large dumps of iron ore fines and blue dust at
these mines. Steel Authority of India Ltd alone is supposed to be
sitting on 45mt of iron ore fines and blue dust dumps. Thanks to
China, we have been able to clear this mess to some extent. Faced
with a mining ban in Karnataka, JSW Steel Ltd not only adapted to
survive, but also became one of the most efficient steel companies in
the country, despite using one of the worst quality iron ore. Infrastructure is another important challenge facing the mining industry.
Railway haulage in India is six times what companies in Australia or
China incur. Coal India Ltd claims it can increase production by a
whopping 300mt, or almost by two-thirds, if the government can
construct three railway links of 50-100km each. It seems unbelievable
that something as small as this can hold our country to ransom. A
new resolve is needed here. Having the same party in power both at
the centre and the state might help resolve the matter. All hopes are
on the new government. Can it modify the growth path?