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Revisiting mining sector in the wake of coronavirus pandemic
4 min read.Updated: 13 Apr 2020, 10:09 AM ISTShantanu Rai
We need to incentivize our pelletisation units by providing input support for raw materials and utilities, removal of export duty for pellets, promotion of slurry transport etc
We need to explore all plausible avenues to enhance the revenue stream to the government in this time of economic turmoil
The force majeure situation created by the coronavirus pandemic will not only test the resilience of our economy but also 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 and give us a competitive edge.
The mining sector (or the larger mining-metals and manufacturing consideration set) is poised to play a critical role in revival of economy and will form the cornerstone of our efforts to hit the reset button. The changing market and operational dynamics require extensive mining reforms to overcome this situation and turbocharge the economy.
First things first, we need to alter the mining product mix basket. Traditionally, the focus has been on run of the mine 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, prices will fall amid the slow down, but at the higher-quality end supplies are tight. 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. We need to incentivize our pelletisation units by providing input support for raw materials and utilities, removal of export duty for pellets, promotion of slurry transport etc.
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. 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 international best practices.
To enhance economic viability of mining projects, it would be prudent to rationalize taxes across the value chain. Revisit tax rates to bring 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, which set 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% in China, (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.
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 (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) while at the same time ensure uninterrupted supplies for domestic industry. 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. 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 a consultant with NITI Aayog. Views expressed are of his own)