The mining sector holds huge potential, even though it has been expanding only gradually. Bulk minerals such as coal, iron ore, bauxite and limestone present the maximum opportunity. These minerals serve critical end-use industries such as power, automotive, cement and steel, and are thus expected to witness high growth. The mining sector will also receive a major boost from infrastructure and construction activities. However, growth in the mining and metals industry still lags behind the country’s overall economic growth primarily due to infrastructure bottlenecks, land acquisition and environmental challenges, governance issues, mining bans that are in force, financial distress and lack of access to growth capital.
Coal, lignite and limestone
The government has been focusing on effectively exploiting its 315 billion tonnes (bt) of domestic coal reserves to achieve an output of 1.5 bt by 2022 and cut non-coking coal imports to zero. Though a roadmap to achieve more than 908 million tonnes (mt) of coal production by 2019-20 was prepared for Coal India Limited (the largest producer of coal in the country), due to a combination of factors such as sluggish in-dustry growth, change in the energy mix, and environmental and land acquisition challenges, the time frame for reaching the goal has been shifted to 2025-26. Emphasis is being laid on qualitative improvements in coal production through selective mining, beneficiation and blending, and diversifying into clean coal technologies.
The cabinet approved a plan permitting private companies to bid for coal mines for commercial production, thus deregulating the coal sector. This reform is expected to drive productivity, increase cash inflows to the sector and streamline irregularities in coal supplies and linkages.
The country’s electricity intensity of GDP has fallen from 1.8 to 1.2, as a result of the rise in energy efficiency due to technology advancements and various energy saving initiatives of the government in the areas of household lighting, commercial buildings, and appliance standards and labelling. As a result, energy intensity is estimated to continue to decline and reach 0.8 by 2030, reducing the energy demand growth for the same level of economic growth, and thereby reducing the demand for coal.
Despite the improving competitiveness of renewable energy and gas-based power, coal is likely to remain the dominant source of energy till 2035. This is due to the increased availability of domestic coal, sector optimisation via regulatory changes, and limited gas availability.
While expanding solar and wind capacity will cut the share of coal in the energy mix in the long term, the demand for coal will remain strong.
India is the second largest producer of cement after China. The outlook for the cement sector is bright in the medium term, though the near-term outlook appears challenging. With the increasing focus on infrastructure development and the housing sector (urban and rural), corporate confidence has improved. The cem-ent industry’s expected expansion in the medium term will be a key contributor to the demand for coal, lignite and limestone.
Hindustan Copper Limited (HCL), a major player in the copper industry, has chalked out an expansion plan to increase mine production from 3.8 million tonnes per annum (mtpa) to 20 mtpa by 2023-24 with a capital outlay of Rs 55 billion. Of the total investments, around Rs 20 billion will be made in mining and the rest for manufacturing copper cathodes. Hindalco, another key player, is planning to invest Rs 10 billion in downstream expansion to increase the contribution of aluminium and copper value-added products in overall sales. The company has entered into long-term contracts to assure a sustainable supply of copper concentrate, largely through imports. Meanwhile, Vedanta’s smelting operations at Tuticorin, Tamil Nadu, have been halted on account of local protests over pollution-related health and environmental hazards caused by the copper smelter plant.
With limited copper resources in the country, imports are likely to continue to dominate the domestic market. Besides, in the past few years, a number of small and medium copper alloy fabricating units have been forced to shut shop due to the inverted duty structure that makes the import of raw materials costlier than the finished products. There is a need to take steps to reverse the trade trend through an increase in import duties on refined copper products, further reducing or removing the import duty on raw copper concentrate, giving export incentives, etc. The closure of Vedanta’s operations in Tuticorin is likely to have an impact on exports, as other producers have diverted their production, meant for export purposes, to meet domestic consumption. Given India’s mining production is only 0.2 per cent of global output, there exists a massive opportunity for greenfield exploration and brownfield expansion.
One of the major consumers of iron ore is the steel industry. The National Steel Policy, 2017, projects the country’s steel production to be 300 mtpa by 2030-31. To meet the projected steel production, the likely demand for iron ore is 437 mtpa. This translates into a requirement of about 1.5 mt of iron ore to produce 1 mt of steel. As per India Infrastructure Research, the demand for steel is estimated to reach 129-139 mt by 2023-24. Developments with regard to real estate construction, infrastructure projects (in sectors such as urban rail, ports, railways and bridges) and engineering and fabrication activities are expected to lend momentum to the demand for the metal. This suggests an overall iron ore demand of 188 mt-202 mt by 2023-24. However, this is a conservative figure, as it is calculated based on the demand from steel only. Other key consumers of iron ore (such as cement, ferro alloys, coal washeries, etc.) will only add to this projected demand.
Bauxite consumption is driven mainly by the aluminium industry. India has a huge untapped potential with regard to the metal’s consumption. This is reflected in the country’s per capita aluminium consumption of 2.2 kg, as against the world average of 10 kg. As per a Crisil report, aluminium consumption is expected to increase from 3.3 mt in 2015-16 to 5.3 mt in 2020-21, a compound annual growth rate of 9.94 per cent. Assuming the same growth for the following three years (till 2023-24), consumption is expected to reach 7.04 mt by 2023-24. Meanwhile, according to industry estimates, about 5 tonnes of bauxite is required to produce 1 tonne of aluminium. With this, bauxite demand by 2023-24 works out to be around 35 mt. According to industry estimates, the total demand for bauxite could reach about 50 mt by 2023-24.
The growth of the electric vehicle (EV) market will also have positive consequences for aluminium producers. Demand for aluminium, and therefore bauxite, will also rise on account of infrastructure for serving EVs, since aluminium is commonly used as housing material for EV charging stations. However, the pace of EV adoption will depend on the availability of charging infrastructure in the country.
Opportunity for underground mining
There is huge scope for increasing underground mining operations as the technique accounts for less than 10 per cent of the total output. Underground mining will no doubt gain traction, given the depth at which mineral reserves are found. As the technique is equipment intensive, it presents a major opportunity for equipment providers. It must be noted that all minerals, including coal, will require large-sized equipment to carry out mass production mining.
The Indian economy’s growth is being challenged by global headwinds such as volatile crude oil prices, the US-China trade war, falling metal prices, etc. How these issues are managed will determine the direction and pace of growth for all the sectors, especially mining, which is still seen to be struggling even after passing of the Mines and Minerals (Development and Regulation) Act and other enabling legislations. Meanwhile, shares of non-ferrous producers such as Hindalco Industries Limited, Vedanta Limited and National Aluminium Company Limited have fallen since early November 2018. While shares of steel producers have fallen too, investors in these companies have another worry to contend with – the acquisition of steel plants acquired at rich valuations. While it’s early days yet, this is clearly a risk.
Going forward, the government’s Make in India initiative is expected to drive the growth of several critical industries, including mining. In fact, the success of the initiative will depend on the growth of the mining industry, else the manufacturing segment may need to rely on imports to meet demand.