Positive Outlook: Strong project pipeline bodes well for the future

Strong project pipeline bodes well for the future

Growth in the Indian mining sector has picked up momentum over the past couple of years with the sector’s output growing at nearly double digits. The government has played a vital role in giving the required impetus through various policy measures aimed at reviving activity in the sector.

Project pipeline

According to Indian Infrastructure Research, there are about 300 major mining projects across the country. Together, these projects entail an investment of over Rs 1,569 billion, of which minerals such as coal/lignite and iron ore offer maximum opportunities worth over Rs 1,446 billion, while mining projects related to copper, lead/zinc, limestone and bauxite together entail an investment of about Rs 123 billion.

  • Project pipeline by ownership: Of the total 299 projects identified for implementation, 174 projects worth Rs 1,009.13 billion are owned by the central government, 77 projects worth Rs 364.12 billion are owned by the private sector and 48 projects worth Rs 196.69 billion are owned by the state governments.
  • Project pipeline by stage: There are 224 projects worth Rs 1,231.33 billion that are under implementation, while 75 worth Rs 338.62 billion have been recently announced.
  • Project pipeline by category: Of the 299 projects, 183 projects worth Rs 974.84 billion are greenfield projects, 94 projects worth Rs 524.35 billion are brownfield, while 22 projects worth Rs 70.75 billion fall under neither of the two categories.

Mineral-wise outlook

In the near term, the mining sector is expected to witness higher growth, despite the various challenges plaguing the sector. While changes in the policy framework will be significant enablers, the increasing demand for mining output is expected to maintain the sector’s buoyancy.

Coal

Coal demand is expected to increase from around 800 million tonnes (mt) in 2015-16 to 1,282 mt by 2019-20, a compound annual growth rate (CAGR) of 9.2 per cent between 2015-16 and 2019-20. These figures have been estimated on the basis of the actual demand in 2014-15. In 2015-16, the revised estimates of actual coal demand stood at around 822 mt (NITI Aayog). However, going forward, schemes such as the Ujwal Discom Assurance Yojana are expected to improve the financial standing of discoms, which will further increase their demand for coal.

The power sector will continue to account for most of the coal demand, at approximately 77 per cent of the total by 2020. This is because of the expected increase in the installed coal-based capacity to around 287 GW in 2020 from 165 GW in March 2015. Meanwhile, the captive power segment is expected to increase its coal demand to 72 mt by 2020 owing to an estimated increase in installed coal-based capacity to 49 GW by 2020 from 34 GW at present.

Based on the large steel capacity expansion projects announced, finished steel production is expected to cross 110 mt which will subsequently lead to an increase in demand for coking coal to over 70 mt, by 2020. Cement production is also expected to increase at 8 per cent per annum and capacity utilisation levels of cement plants are also likely to improve, leading to an increase in demand for coal to 38 mt by 2020. Meanwhile, demand from other industries is estimated to follow past growth trends and reach 85 mt by 2020.

With regard to the supply of coal, Coal India Limited (CIL), Singareni Collieries Company Limited (SCCL) and captive power producers are expected to increase their supply to 1,198 mt by 2019-20 as against 600 mt in 2014-15. The maximum increase in production will come from CIL as it gears up to meet the central government’s target of producing 1 billion tonnes by 2020, while production from captive coal mines is expected to witness the fastest growth. SCCL has been given a target of reaching 80 mt by 2020. It plans to achieve this by scouting for coal assets overseas (Indonesia and South Africa) with a production potential of 5 million tonnes per annum; operationalising the recently secured Naini captive block (with estimated reserves of 500 mt); and operationalising three to four mines every year at a capex of about Rs 24 billion.

So far, 31 coal mines (17 Schedule II and 14 Schedule III) have been auctioned in three tranches. Of the 17 Schedule II coal mines auctioned, mining operations have commenced in/permission to operate has been granted to 10 mines, while the remaining are still obtaining the necessary statutory clearances and appointing mining contractors in order to resume operations.

In many cases, the matter of the appointment of a mine developer-cum-operator (MDO) is sub judice. In addition, one Schedule III coal mine has also received permission to operate. Mining operations in Schedule III coal mines are expected to commence only in the next two to three years as they were not operational at the time of allocation.

Iron ore

With the gradual easing of restraints on iron ore mining, growth in the sector is expected to revive. Finished steel production is expected to reach 118 mt by 2020, based on the large steel capacity expansion projects on the anvil. Subsequently, iron ore production is expected to reach 242 mt by 2020 as regulatory restrictions are not likely to affect mining companies in the long term. However, due to declining prices (in line with the global scenario) the iron ore industry is likely to experience an oversupply. Also, with the Mines and Minerals (Development and Regulation) Amendment Act, 2015 coming into effect, the iron mining industry is expected to witness significant pressure on pricing over the next few years.

Limestone

Growth in the cement industry, the principle consumer of limestone, is expected to be driven by the government’s push to build infrastructure  (sustainable housing, roads and highways, etc.). Cement production is expected to increase at 8 per cent per annum and capacity utilisation levels are also likely to improve. Therefore, cement production is likely to increase to 397 mt by 2020. Further, given that nearly 95 per cent of the country’s limestone production is of cement grade, growth in the cement industry is expected to spur a proportionate demand for limestone. Accordingly, demand for limestone is expected to reach 432 mt by 2020.

Bauxite

The government’s thrust on the power sector is expected to lead to a growth in demand for aluminium on account of higher consumption and investment. Overall, as per industry analysts, the demand-supply dynamics for primary aluminium look encouraging with expectations of about 6 per cent growth in demand in the coming years. Further, the global decline in energy prices may result in a decline in production cost and prices of bauxite. Thus, demand for bauxite ore seems robust in the medium to long term.

Copper

According to the Ministry of Mines, the demand for copper (consumption of refined copper per annum) is around 500,000 tonnes. This is likely to grow with the increasing focus on the manufacturing and power transmission segments. At present, India’s per capita consumption of copper is around 0.5 kg as compared to the global average of 2.4 kg, which implies a significant potential for growth in demand for the metal.

Zinc

Despite the growing pressure on commodity markets globally, the fundamentals of zinc remain strong owing to its short supply. As per industry estimates, global zinc consumption is expected to increase by 4 to 5 per cent per annum in the coming years, which needs to be met by higher mine output. In the Indian metal market, zinc demand is likely to increase at a CAGR of 6 per cent, backed by initiatives like Make in India, and the thrust on rural electrification and infrastructure development.

Lead

The demand for lead, which is primarily used in for manufacturing batteries and power backup systems, is led by the automobile and telecom sectors. Amid declining fuel prices, the automobile sector is expected to witness considerable growth. Further, the telecom sector will continue to expand. Accordingly, lead demand is estimated to grow at about 4 per cent in the country.

In sum

In the coming years, the mining sector is expected to witness significant growth. While on the one hand, changes in the policy framework will give the required impetus to increasing the supply of minerals, on the other, the growing demand will help augment sector growth.

With regard to the type of mining methods adopted, underground mining is expected to pick up, along with the adoption of modern technology and equipment. For underground mining, minerals such as lead, zinc and copper will offer significant potential.

Bulk minerals such as coal, iron ore, bauxite and limestone present the maximum opportunity to mining companies. These minerals serve critical end-use industries such as power, cement and steel, and are thus expected to witness high growth.

Factors such as the emphasis on increasing output, the safety of miners, long-term profit margins, need for operational flexibility, minimisation of road transport, accessing deeper deposits/higher stripping ratios, etc., are likely to result in greater mechanisation of mining activities. The use of the internet of things and wireless sensor networks; unmanned aerial vehicles in activities such as surveying and monitoring; artificial intelligence; and the deployment of environmental monitoring and video analytics is expected to gain traction in the medium term. Personnel training will be crucial for reaping the full benefits of these practices. Enhancing institutional capabilities will also be critical for creating a level playing field, which will help attract greater private sector participation.