Bright Picture

Changing mining equipment market

Dipesh Dipu, Partner, Mineral Policy Consultant, Brookings India

The earthmoving and mining equipment industry has witnessed a fair degree of uncertainty in the recent past on account of lower-than-expected demand from the mining and infrastructure sectors. This, in turn, has been a result of lower growth in demand from the private sector and slower project implementation.

Demand drivers

The economic growth of the country appears to have slowed down. Data from the government has shown relatively robust growth in value- added terms. However, when adjusted for change in computation of GDP growth series from earlier time periods, growth does not appear to be as good as had been expected. In essence, the economy has not witnessed the kind of growth that a country of India’s size and track record may have desired.

The infrastructure and mining sectors have strong dependence on or, perhaps, a recursive relationship with economic growth. With economic growth in the suboptimal zone, growth in infrastructure and mining has been slower as well. Due to auction-related challenges, new private sector mining project developments have been slower. For instance, the coal blocks auctioned and allotted post the deallocation by the Supreme Court in 2014 have seen only marginal improvement in production in 2018-19 in comparison to 2014 levels (prior to the deallocation), when it was expected that the operating mines would continue and even enhance production, and new mines would be commissioned in a two- to three-year time horizon. Auctions in mineral blocks have also yielded similar outcomes with aggressive bidding leading to manifestation of the winner’s curse and, thus, reluctance on the part of the winners to invest in operationalising the assets won through hard-fought competitive bidding.

This, however, must be seen as a temporary phase in light of the overall growth potential of the country’s mining sector. It can be explained on account of lower per capita consumption of energy and industrial and other minerals versus global and, in several cases, emerging countries’ averages. The long-term fundamentals remain intact and could soon reignite economic growth engines with a few reform initiatives from the government and more spirited private sector investment decisions.

Impact of contract mining business model

The predominantly government-owned mining sector has moved largely to the contract mining business model and has faced delays and challenges in the appointment of contract miners. In these cases, the contract miner selection through a rigorous two-stage competitive bidding – first stage of initial price offer in sealed covers followed by a second stage of electronic reverse auctions – has led to extreme price discoveries, often falling on the edge of an infeasible zone. This could have led to delaying tactics by the contract miners, who through these contracts, typically, tend to have the responsibilities of procuring legal clearances and permits, acquiring land, rehabilitating and resettling project-affected people, and then constructing, developing, operating and maintaining the mining projects.

This dominance of contract miners in the sector has had a threefold impact on mining investments and demand for equipment and technology. First, the customers for mining equipment, technology and service (METS) companies are no longer government-owned companies themselves, but privately owned contract miners. This is good from the perspective that METS companies have better access to potential customers and could avoid the rigmarole of often rigid and, sometimes intentionally biased, procurement processes of government-owned companies. That certainly promises ease of doing business for METS companies in India. Contract miners, selected through the auction-based process, and perhaps even otherwise, tend to be value and price conscious. Any equipment or technology that promises to save money for them may find greater traction and may increase the customers’ willingness to purchase.

Second, due to cut-throat competition, contract miners tend to lose focus on longer-term investments and prefer quick short-term returns. As a result, there has been a discernible shift in the preference for smaller-sized equipment. This equipment provides flexibility of operations and better economic efficiency in terms of cost per unit of material handled due to lower capital costs and better fuel efficiency. The flip side of this preference is crowding of mines which may have a compromising impact on safety. However, this trend in the Indian mining sector seems irreversible for now as capacity additions being planned by government-owned companies have largely been conceived through the contract mining model. As a result, the market for mining equipment is likely to remain skewed towards smaller capacities.

Third, with contract miners at the helm, the business model for equipment purchasing itself is changing. Original equipment manufacturers (OEMs) themselves or through their authorised representatives may have to partner with contract miners in project deliveries. This essentially means that equipment suppliers may not be able to walk away once the equipment is supplied and paid for, but may have to have skin in the game through performance guarantees and performance-linked payment structures. This trend may have significant impact on OEMs and they may have to rework their strategies for the markets in India. Focus will have to shift towards ensuring promised production volumes at predetermined life cycle costs, and risk sharing in projects with the contract miners. The process of procurement itself may start well before the actual purchase of the equipment, through working with contract miners in their bidding process. This may entail betting on a likely winner and building deep trust relationships with contract miners of their choice. This may be a tectonic shift for equipment suppliers from the earlier process of keeping a watch on the market and then approaching a successful bidder to sell their equipment. The new approach will require greater investment in India-specific innovation, team and capacity building for monitoring of mining operation and maintenance (O&M).

These trends put together are expected to raise the transaction costs initially and as the transformation of the mining industry reaches maturity, may then begin to bear fruit of enhanced economic efficiency, productivity and performance for all stakeholders, including OEMs, contract miners and mine owners. OEMs will have to move from pure-play manufacturing capabilities to mining O&M, financing and risk management capabilities. This will require their organisational transformation, building new alliances and partnerships, and greater local content in manufacturing and maintenance services.

Surface mining to continue its dominance

The Indian mining sector has been dominated by surface mining – several bulk and even disseminated deposits are mined mostly by opencast methods. The share of underground production has been shrinking even in the coal sector, and is currently lower than 9 per cent. Underground mining is more expensive in the Indian context, due to higher labour intensity and lower productivity on account of geological uncertainties (which can be partially blamed on inadequate exploration). Thus, economics, coupled with higher tolerance towards environmental risks, have led the industry to adopt surface mining technologies. So, the mining equipment market is expected to remain biased towards such equipment. Shovels and dump trucks, surface miners for coal and limestone, dozers, motor graders, crushers and sizers, and auxiliary equipment will continue to dominate the Indian mining equipment market. Nuts-and-bolts type of innovation that can help improve economic efficiency, equipment longevity and reduce the environmental impact may find ready acceptance. However, the mining industry seems to have lower appetite for breakthrough technologies such as driverless trucks and driverless long-haul equipment.

It is expected that with deeper mineral deposits and lower land availability, there will be greater application of in-pit crushing and conveying (IPCC) technology and equipment. IPCC has had limited success in India so far, perhaps due to its inappropriate application and poor operational planning. However, as the conveying distances increase, and with greater focus on progressive mine closures, IPCC is likely to gain traction. The OEM and contract miner partnership model also has a higher chance for successful adaptation in India.

There is growing demand for mining services such as data-driven predictive maintenance services, strata-control practices and those that enhance operational reliability. But, again, due to extreme cost sensitivities, the market for such technologies and services has not grown to the extent anticipated. Short-termism has made the technology adoption path oblique, even when these technologies are observed to not only pay back quickly but make surface mining operations sustainable in the longer term, providing good returns on investments.

Outlook and conclusion

The outlook for the mining equipment industry may be summarised through its continued tilt towards miniature surface mining equipment, followed by wider acceptance of offerings that have the potential for savings and enhanced economic performance. On the business side, the markets are going through a transformation with greater private sector contribution in production through contract mining. This is already having an impact on equipment business models and these impacts are likely to only deepen in the future.

The rate of demand growth for mining equipment has been subdued in the recent past, but the future holds greater potential on account of undeniable demographic dynamics of the Indian market. The mining industry and, hence, mining equipment industry, has to grow. However, there is a need for a spur, perhaps, through changes in the regulatory environment. It is expected that with the right stimulus from the government, the mining sector will find its true bearings and lead to higher demand for mining equipment, technologies and services.

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