Innovation focus holds the key2 min read . Updated: 06 Sep 2010, 11:17 PM IST
Innovation focus holds the key
Innovation focus holds the key
The Indian metals and mining industry is competitive if financial performance is the key determinant. While the global mining industry has had a history of 15-20% net profit margins in the last five years, the best being 26-27% during the boom times of 2007-08, Indian miners had their margins upside of 35%. A similar performance is seen in shareholder returns. Metal companies with captive mines have also performed better than global peers and some Indian firms have set the benchmark for low-cost production.
However, this does not bring much cheer when underlying factors are analysed. The competitiveness of Indian mining is primarily factor-driven and that of the metals sector, to a certain extent, efficiency-driven. Low-cost labour has been the fulcrum of this competitiveness. There have been nuts-and-bolts types of innovation that have led to extended equipment life, but none that can qualify as a driver of competitiveness.
Unfortunately, lower environmental and social compliance costs have also been the reason for the current level of high competitiveness in the industry. However, if recent events are any indicators of future policy and legislative initiatives, the cost of sustainable development for mining and metals projects is likely to rise substantially.
The mining sector, which has been dominated by government-owned firms, has had easy access to reserves and has focused on shallow deposits, extracting them with surface mining methods. Deeper resource bases and environmental concerns will force the industry to go largely underground. Technology adoption will not be an option. The relatively more efficient metals sector, too, has realized the need for technology improvements and that is reflected in the spate of joint ventures formed with Japanese and Korean manufacturers. The metals sector, too, has been clamouring for captive mines, duties on ore exports, lifting of import duties on raw materials and other incentives. Some of these may be justified to keep Indian metal products competitive, but a hard look at the resource optimization and process improvements may do the sector long-term good.
Competition has been skewed in the metals and mining industry. Statutes and policies have kept competition at bay from the large government-owned companies. Foreign miners have been waiting in the wings eternally for entry into lucrative coal and iron ore mining. In coal mining, captive mining rules have led to inexperienced power generation companies, many of them state-owned financially weak utilities, getting coal blocks. This has led to sluggish development of coal mines.
The recently approved competitive bidding process for resource allocation is likely to result in transparency, but will keep the degree of competition low until the restriction of captive consumption is abolished. A large number of participants with no restrictions on fair transactions will help large-scale private and foreign investment, and help build global competitiveness. The enactment of the Coal Mines (Nationalization) Amendment Bill, 2000, may be a step in that direction.
The metals and mining industry can be truly competitive in the long term, given the large pool of natural resources, keen entrepreneurial spirit, healthy financial position and availability of talent. The industry, however, needs to focus on innovation, to be agile enough to adopt stringent sustainability standards and respond to the opportunities that growth presents.
Dipesh Dipu is an independent metals and mining sector consultant, a mining engineer from the Indian School of Mines and a chartered financial analyst.