In part one of Modi-Fication, Sohrab Darabshaw analyzed a report by Barclays Equity Research on how the new government of recently elected Prime Minister Nerendra Modi could affect India’s domestic coal-mining industry. Here, he explains how regulations and Indian coal exporting could change.
Barclays Equity Research feels that a comparison of the Indian mining industry with global mining regulations and practices shows that regulations have evolved in India much as they have in further advanced countries. However, India needs to learn from global best practices to implement efficient regulations to achieve a scale and productivity comparable with the rest of the world.
Indian mining policy takes certain cues from other countries such as the US. The new government is looking to adopt suitable policies:
- Introducing competitive auctions for allocation of other minerals apart from coal.
- As the Central Mine Planning & Design Institute, a Government of India body, is the only current exploration agency, the government should look to expand its activities and encourage it to use best-in-class exploration technology. On the other hand, it must also promote participation of public sector undertakings in coal exploration as it has been approved in The Coal Nationalization Act. This would aid the auction process as bidders would have better technical data to rely on to bid appropriately.
- Deregulation of exploration activities that allows private exploration in blocks with unknown reserves should be considered. Transfer of the same to the exploration company in case of mineral discovery can lead to more private exploration participation.
Barclays felt there was a need for reform in the iron ore sector, too. This space had seen a “significant clean-up” after the Supreme Court of India’s interventions over the last two years, including the court’s decision to allow the restart of iron ore mining in Karnataka and Goa.
However, it said, the roles of the provincial governments and Ministry of Environment and Forests clearances by the Federal Government all remain crucial for faster renewal of mining leases. “Clarity on regulations for allocation of new iron ore mining is critical to ensuring the sustainability and competitiveness of India’s steel sector,” the report said.
The key beneficiaries from ‘reforms’ in the iron ore sector
The steel sector, in general, needs access to domestic iron ore if it is to remain competitive. There is not much the central government can do on the iron ore mining front, but claritying mining regulations would go a long way toward improving investment confidence in the sector, according to the report. In its election manifestos, the now-ruling Bharatiya Janata Party (BJP) has given top priority to manufacturing growth, export growth and import substitution. With a recovery in the key manufacturing and construction sectors, Barclays said the steel sector could witness a significant recovery by 2016.
The BJP government’s focus on creating adequate urban and physical infrastructure and several new urban centers should bode well for a steel demand recovery in the medium term. Barclays predicted steel demand growth of 7.4 percent in FY16.
Domestic steel price premiums are currently at historic lows and a recovery would provide an upswing. Despite the current weak demand environment, large domestic steel manufacturers, including Tata Steel, have been able to increase prices in the last quarter. However, this has been more because of a sharp depreciation in the currency over the past year as exports became more profitable than the domestic market. Should domestic demand pick up, Barclays said it does not rule out a rebound in domestic premiums.
Domestic steel prices should be relatively insulated from global iron ore oversupply. Barclays said it’s of the belief that lower iron ore prices could effectively flatten the cost curve of the steel industry and, in turn, put pressure on steel prices in the medium term. While this would likely result in margin pressure on the steel industry, the impact on domestic steel prices could be significantly muted as:
1) Domestic iron ore pricing dynamics are delinked from global factors to a large extent
2) The steel premium in the domestic market had room to increase as domestic demand improves
Sohrab Darabshaw contributes an Indian perspective on industrial metals markets to MetalMiner.