Indian investors tracking basic industries had a relatively easier task till now. They had to keep one eye on the macroeconomy, and assess the interplay of factors such as demand-supply, raw material cost and availability, and the landed cost of imports. These factors can be tracked since they are tangible and measurable. For example, aluminium’s price on the London Metal Exchange is a key factor affecting valuation of aluminium firms’ shares. Of late, soaring costs of fuel and coal have become critical factors as well. But raw material availability or cost is not a big factor, as major primary aluminium producers have captive mines.
Policy has now emerged as a new and significant factor on the horizon, one which is intangible and, hence, not easily measured. Environmental policy and regulations at the central and state levels are affecting business. The key players are the government itself, regulators (such as pollution control boards) and courts.
On Friday, the Supreme Court announced a ban on mining in two more districts of Karnataka, after its ban on the Bellary district earlier. Environmental degradation due to illegal mining led to the ban. Mining firms such as Sesa Goa Ltd and NMDC Ltd, and steel makers such as JSW Steel Ltd will be hit by this. They claim to be innocent, but are nevertheless affected.
On Saturday, Birla Corp. Ltd announced that a court order has banned mining within 10km of the Chittorgarh Fort. The company has suspended mining at its limestone mine, which feeds its Chanderia cement plant. These are two recent instances. There have been several such, with some high-profile ones such as the Vedanta Group’s aluminium project in Orissa, and every month one hears of some major development in this space.
And it is not just in India, this trend is becoming visible overseas as well. Resource-rich nations such as Indonesia and Australia are becoming protective of their resources. This is resulting in some changes contemplated to foreign ownership laws or export levies, which could affect Indian companies’ investments or the cost of imports from these and other countries.
Investors should be aware of this new monkey on their backs. The factor may be intangible, but its effects are real. A hike in export duty on iron ore, for example, has visibly eaten into the profits of miners. And Friday’s mining ban announcement caused Sesa Goa’s price to fall by about 6% on that day (though it recovered on Monday). Companies in sectors such as mining, metals and chemicals should also become more proactive with disclosures. At present, most firms wait for an adverse event to happen before reporting it to the stock exchanges.
US company filings with the Securities and Exchange Commission report current litigation or external developments that could affect their operations. Indian companies, too, should be required to do so.
Even if that does not happen, investors in basic industries need additions to their to-do list. They need to watch out for environment-related agitations, and also trawl government and state pollution control board websites for new legislation, rules, and keep an eye on litigation. It can make a big difference to the value of their investments, as recent events have shown.
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