Outlook for minerals sector in India - 2009

1) What will be the key drivers of growth for the mining industry (particularly coal, aluminium, copper, iron ore etc) in future?

Key drivers for the raw materials essentially will be the inclusive growth that the nation targets. In terms of per capita consumption of energy, steel and other metals, India lags behind the global averages, and substantially lower than OECD countries. It is expected that as the country progresses at 7-8% growth year on year, these consumption rates are likely to rise, as have been indicated from the correlation of the per capita consumption with growth in developed and other developing countries.

As part of this growth, it is estimated that power generation sector will grow to twice its current capacity by the next five year plan, steel sector is likely to produce close to 125 million tonnes by 2012-13 (more than twice of the current level of production). Similar growth paths are envisaged for other metals and their consumer sectors like automobiles, electric cables, construction and infrastructure. These will be the key drivers for growth in the mining industry.

2) In the short and long terms, how will the market for the following minerals/metals progress?

Aluminium - The global production of bauxite in 2008 was 205 million tonnes with the main producers being Australia, Brazil, China, India, Guinea and Jamaica. The total production from countries mentioned above was 173 million tonnes, which represents 84% of the global bauxite production. Last two quarters have seen sluggishness in demand and hence, production but the trends show that demand is picking up and some of the suppliers are beginning to enhance production. China is expected to account for a substantial proportion of the growth in world aluminium consumption over the period to 2012, reflecting strong growth in that country’s manufacturing output and investment in infrastructure. Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Consequently demand for bauxite is also expected to grow at a similar rate as it is the main input for production of Aluminium.

Copper – The global copper production and prices have been volatile and yet have been more than the crests hit during the first quarter of this year. The Chinese demand has been picking up that has kept the copper prices higher. The trend is being ascribed to the government stimulus package announced by China. In the Indian context as well, the lower prices of the recent past after the peaks of 2007-08 have resulted in Hindustan Copper declaring substantial drop in profits. The pressures on margins due to lower demand and hence, prices may be expected for some more time but even in short run, industry expects to get a booster dose due to Indian government embarking substantial expenditures on power generation.

Iron ore – Iron ore industry witnessed historical high prices in 2007-08 and with the slump in global demand, the prices for the current fiscal, for both lumps and fines are lower by 25 to 40% from the last year. The benchmark pricing negotiations with the Chinese have not yielded any directions as yet, which have led to global iron ore majors tapping the spot markets and contemplating index-based pricing mechanism. As indicated by rise in demand and spot prices for ores and concentrates in June and July 2009, for the short term, global markets are looking to stabilize, although at much lower levels than the peak of 2008. For the long run, however, expectations are that that the demand will grow at good pace. In India, the iron ore prices have followed the global trends. For a few months, stocks were piling at Indian ports for poor Chinese demand. But the rise in steel prices in the domestic markets seem to indicate a reversal in trends, but the confirmation of the same is likely to emerge in the current and next quarters. For the long term, the demand will grow due to ambitious growth expected in steel sector.

Lead and zinc – In these metals categories, the demand has not picked up and the producers, except the Chinese, are observing restraints as any enhancement of production will pull the prices lower. Chinese production has had impact on the inventories. In the short run, a further correction is prices may not, therefore, be ruled out. In the Indian context, the demand in 2009 is likely to be marginally lower than 2008 and in 2010, it is likely to be just a notch more than 2008 levels. Prices in these periods are likely to remain flat.

Limestone - In India limestone is sources from different regions of India, Andhra Pradesh has the largest share in the reserves (34%) followed by Karnataka (13%), Gujarat (13%), M.P (8%), and Rajasthan (6.5%). The major consumers of limestone industry are manufacturing of cement, steel, glass and others. Cement industry in major consumer of limestone about 65-70% of total limestone production is consumed by cement industry. For every one ton of production of cement 1.6 ton of limestone is required, also in steel making around 40 kg lime is required to make 1 ton of steel. Almost entire requirement of limestone in India is met through indigenous mining only. The production of limestone increased at a CAGR of around 6%, over the last 12 years. The growth in infrastructure and construction sectors, that are primary targets of government’s stimulus packages announced, are likely to drive growth in demand for both steel and cement, which in turn are likely to drive demand for limestone.

3) What are the areas of improvement for the significant development of the mining industry going forward?

Mining sector needs structural overhaul to attract investments that can help the sector meet growing needs for raw materials. The sector needs to attract private capital into mining and exploration investments.

The capital markets also need to be prepared for allowing risk capital for prospecting, exploration and mine development. Disinvestment of government companies, partial or otherwise, through IPO routes and enhancing public floats in listed companies may enhance the market depth for mining sector investments.

The amendment to MMDR Act is required to ascribe marketability to prospecting and mining licenses will help the sector reap risk capital and will make exploration a sustainable business for private investment. Government may also facilitate creation of alternate investment market that will provide much needed funds to support prospecting and exploration activities.

Incentive may be provided to encourage innovation and adoption of cutting edge technologies, more so in coal mining sector where the cut-off depth is likely to require capacity additions in underground mining.

Competitive bidding for mining license allocations that has been proposed has its pros and cons. It is expected that the method will enhance transparency and objectivity and may have inherent commercial mechanism to hasten project implementation. Depending upon how these are structured (initial bullet payment, production sharing, revenue sharing or profit sharing) there may be cost implications.

The royalty regime has been increasingly moving in the direction of ad valorem mechanism, which is in line with the global practices. However, a comprehensive study may help arrive at a prudent rate that does not choke investments in mining sector.

Law and order situation, particularly so in the coal mining sector, has been a cause of concern, and has emanated from the issues ranging from land acquisition, rehabilitation & resettlement, employment generation, social contribution and environmental pollution. The government needs to create a framework to address these issues and the industry may do better to adhere to the framework in letter and spirit.

ICVL plans to bid for coal mines in Australia - Quoted in the Mint

International Coal Ventures Pvt. Ltd (ICVL ), a company set up by five state-owned firms to secure coal assets overseas, plans to bid for concessions in the East Bargo area of Australia, which has reserves of around 330 million tonnes (mt) of the scarce fuel.

The move may potentially bring ICVL in competition with leading Chinese government-run coal miners such as China Shenhua Energy Co. Ltd and Yanzhou Coal Mining Co. Ltd, which are actively engaged in acquiring mining concessions overseas.

ICVL, owned by NTPC Ltd, Steel Authority of India Ltd (SAIL), Coal India Ltd (CIL), Rashtriya Ispat Nigam Ltd (RINL) and NMDC Ltd, is interested in submitting an expression of interest (EoI) sought by the Australian government for concessions. The last date for submission of EoI for the 96 sq. km area is 15 October.

“We are interested in the Australian property,” said a senior executive at CIL, who asked not to be identified given the sensitive nature of the issue. CIL controls most of India’s supply of coal.
The successful bidders will be awarded a coal exploration licence for an initial period of five years.

Questions emailed to Julie Moloney, principal adviser in Australian government’s Department of Primary Industries, on Monday remained unanswered at the time this edition went to the press. The department will scrutinize the bids. ICVL executive Ajay Mathur did not respond to phone calls and to a text message to his mobile phone.

The East Brago area, in New South Wales state, is located 30km north-west of the seaside city of Wollongong and around 920km south-south west of Sydney, the state capital and Australia’s largest city. ICVL is competing with Chinese firms overseas to acquire scarce coal assets. Analysts say that bids by Indian miners tend to be relatively uncompetitive. That’s because most Indian firms seek the coal for their own end-use projects, while rival bidders may have higher-margin alternative plans.

India has 256 billion tonnes of coal reserves, of which around 455 mt per annum is mined. The country imports around 40 mt of coal. Demand is expected to reach around two billion tonnes a year by 2031-32, around five times the current rate of extraction, with most of it coming from the power sector.

“The hunt for coal assets has never been so intense, with the Chinese pouncing on all that is there to grab. Indian players carry a fear of making wrong moves in a volatile market faced with difficult value estimation, which keeps their decision-making process hamstrung...,” said Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers. “Also, the Chinese government backs the state-owned enterprises with credit facilities and direct funding, which is in contrast with Indian state-owned companies that need to pool their internal accruals,” he added. “Private companies, too, have been faced with lower credit availability due to liquidity crisis.”

“Bottom line is that there are opportunities for the braveheart and those with cash bags full,” Dipu added.

Coal mining policies need an overhaul

Coal mining sector needs structural overhaul to attract investments that can help the sector meet growing needs for raw material for power, steel, cement and other usages. The sector has been traditionally dominated by the government-owned companies and with limited participation from the private sector. In the current financial crisis this may have been a boon as the government-owned companies have healthier cash positions to keep their capital expenditure plans intact. But there is no denying that private sector participation is a must for augmenting coal production. The Government has indeed made strides in this direction by allowing captive mining for various approved end usages. However, there is a need for streamlining the allocation process as also a need to monitor the progress of project implementation more closely and facilitating the process.

Government may provide roadmap for amendment to MMDR Act to ascribe marketability to prospecting and mining licenses will help the sector reap risk capital and will make exploration a sustainable business for private investment. Government may also facilitate creation of alternate investment market that will provide much needed funds to support prospecting and exploration activities. For this the capital markets need to get prepared as well. Disinvestment through IPO routes and enhancing public floats in listed coal mining companies may enhance the market depth for mining sector investments. Traditionally, Indian mining sector has not been attractive for private equity (PE) firms due to challenges unique to the industry. In India, private sector companies that could potentially be targets for PE funds, have had restricted participation. The miners have traditionally been price takers till recently and have, even globally, underperformed the markets. There are talks of institutionalizing regulatory mechanisms for pricing coal. All these developments put together, financing coal mining projects may present unique challenges.

Political and social issues have become more prominent than ever, with cases of state governments asserting their rights over mineral properties and societies around mineral deposits resisting mining activities quite vociferously. A consequence of these is also the reputation risk, where a Machiavellian wisdom may lead to impairment of brand. Government may need to devise a policy for better settlement of land acquisition issues as much as the industry needs to consider sustainable coal mining with a clear view on social vale addition.

Incentive may be provided to encourage innovation and adoption of cutting edge technologies, more so in coal mining sector where the cut-off depth is likely to require capacity additions in underground mining. Underground mining can serve the purposes of environmental risk mitigation and quality consistency. However, the economics of underground mining are not so favorable when compared with the surface mining methods. The constraints are also from the productivity perspective. In India the productivity of underground mines traditionally has been fairly low. From the mineral conservation perspective, bord & pillar method of underground mining has been quite inefficient with coal recoveries as low as 35-40%. Longwall mining method, although more efficient and mechanized, has not been quite successful in India due to highly faulted geological conditions in Indian coalfields. Strata control has been difficult too in longwall mining. However, with environmental concerns being more and more important, it may be worthwhile to consider underground methods with mass production capacities. The underground mining methods are also expected to reduce procedural delays due to lower environmental damage and lower land requirements for waste dumping, and others. Also, government on its part may like to provide fiscal incentives, including but not limited to reduction in duties on capital equipment.

Competitive bidding for mining license allocations has its pros and cons. The method will enhance transparency and objectivity and may have inherent commercial mechanism to hasten project implementation. The current methods of allocation on point scale on a host of variables ranging from net-worth to extent of completion of the end use projects, and with recommendations from several stakeholders, have inherent subjectivities. This approach may not suffice the purposes of most efficient usages of coal, their conservation and earnings for the government. The point scale basis becomes ineffective when the number of applications is large. The 750 applications for 18 coal blocks identified for power sector in the last round of allocation is a case in the point, where the parameters chosen for development of scale resemble qualifying criteria and make it almost impossible to decide on allocation without a fair bit of subjectivity. Competitive bidding is likely to result in objectivity. Depending upon how these are structured (initial bullet payment, production sharing, revenue sharing or profit sharing) there may be cost implications. But looking at the bigger picture and the urgency to develop new mines, the pros certainly overweigh the cons. Government also needs to then de-risk the mining projects from delays due to approvals and clearances required to make the assets lucrative investment targets.

Proposed coal regulatory mechanism is unique to India which has its roots in the coal market structure and energy affordability. Pricing of coal by the government owned coal producing companies have thus far been opaque, even though prices have been lower than the international prices on energy-equivalence basis. The absence of a vibrant market with large number of buyers and sellers coupled with supply constraints have made fair pricing a difficult proposition in the Indian context. The policies framework should aim at a market driven pricing mechanism, however, till the time it is established, coal regulator may be required.

There are other technologies that can complement traditional coal mining activities and help India secure its energy needs. Underground coal gasification (UCG) is one of the key technologies which can also help tapping coal resources that can not be mined economically with the existing mining technologies. It has been assessed that coal that are deep seated, particularly so the tertiary reserves in Gujarat, are amenable to underground gasification. This method of energy extraction from coal reserves will not be competing with the coal available for other purposes and will only convert a potential into exploitable resource. UCG also will provide energy with minimum surface disturbance and no requirement of surface disposal of ash. There are, however, some unique application prerequisites for UCG like the coal seam being under water aquifer and impervious rock bed; and coal seams being relatively uniform and un-faulted. The applicability of the technology, therefore, needs to be assessed in greater details in light of the geological conditions in Indian coalfields.

Coal-to-liquids (CTL) and coal-to-gas (CTG) conversions are now included as approved end-usage for captive coal mine allocation, and recently, two coal blocks have been allocated for these purposes. The technologies have been commercially proved globally and can help India reduce oil imports. According to some media reports, coal conversion to petroleum products becomes economically viable if the crude prices are above a certain threshold for a barrel. In light of the recent peak prices and future expectations, the CTL technology appears viable. Production of petroleum products from coal will reduce country’s import dependence particularly so from the politically unstable locations. Production of intermediate syn-gas can be useful even for fertilizer production and replace usage of naphtha.

The other prominent ways of extracting value from coal are coal bed methane (CBM), coal mine methane (CMM) and abandoned mine methane (AMM). In India, CBM has been more successful than the others. Recently, first CBM based CNG gas station has been reported to be opened in West Bengal, which is likely to enhance investor confidence. Coal India Limited has also initiated the process of developing CMM and AMM resources through public-private-partnership. It, however, remains to be seen if the initial interest exhibited by the bidders culminates into commercial exploitation of methane, which also is good for carbon credits.

A comprehensive policy is required to be formulated for the purpose of effective and efficient utilization of nation’s coal resources. The abundance of coal promises to provide energy at affordable prices and can be substitute of expensive imports to significant extent. However, the technological and economic viability have to be established and the government-owned agencies as well as private and foreign participants need to be provided incentives to invest in the sector. Provision of energy is paramount to the continued growth of the economy and harnessing coal resources is undoubtedly one of the most important ways to secure India’s energy needs.

MMTC loses Chhattisgarh power project - Quoted in the Mint

The Chhattisgarh government has decided to scrap a controversial proposal to award a 1,350MW power project and a coal mine to state-owned mineral trading company MMTC Ltd, which had sought to partner with a private sector firm to develop the project.
The proposal had triggered charges that the state government had not followed due and transparent procedure, and even officials associated with the process raised concerns that awarding it to MMTC would allow a private firm access to the coal, a commodity that is increasingly becoming scarce.

Mint had reported on 13 October that the Chhattisgarh government was pushing for the project to be awarded to MMTC although it doesn’t have much experience in either power generation or mining.

The deal was being finalized by sidestepping a sealed financial tender and based on a simple presentation by certain invited companies, the report said. Power projects in India are usually awarded through a bidding contest, with companies quoting the lowest cost of generation per unit typically winning the contracts.

The proposal “is now abandoned”, said N. Baijendra Kumar, Chhattisgarh’s principal secretary for public relations, the spokesperson for the state government. Kumar added: “The Chhattisgarh Mineral Development Corp. (CMDC) is now processing for a fresh tender.”
“We feel that we will get a better deal if we go for a fresh tender,” he added when asked why the proposal had been scrapped. A senior MMTC executive, who did not want to be identified because of the sensitive nature of the issue, said the state-owned company had never been officially told by the Chhattisgarh government that it was being awarded the project.
“We are unaware about a fresh tender being considered as we are yet to receive an official communication,” the executive said. “We participated in the process and gave our presentation. Beyond that we are not aware of anything.”

MMTC had plans to execute the project through a public-private partnership route and had sought a so-called expression of interest, or EoI, to form a joint venture. Seven companies, including the Indiabulls Group, Adani Group, Tata Power Ltd and Larsen and Toubro Ltd (L&T), were shortlisted. “With this (Chhattisgarh government) decision, we have now dropped the plans,” said the MMTC executive. Indiabulls Group, Adani Group, Tata Power and L&T could not be contacted for comment over the weekend.

India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) per annum is mined. The country currently imports around 40 mt of coal.

One of the concerns that was being raised was that the coal mine reserves were more than adequate to generate 3,500MW of power and the excess coal could be traded commercially.

“The opaque transactions and complex structures are manifestations of deficient coal allocation policies tilted in favour of captive users that may not have either expertise to mine coal or (the) financial resources to invest in coal mining and power generation,” said Dipesh Dipu, principal consultant, mining, at audit and consulting firm PricewaterhouseCoopers. “Essentially, the work of coal production is done by specialist coal miners or contractors, but the captive mining regulations force creation of several layers,” Dipu said. “A vibrant market with large number of market participants, prudent eligibility constraints for entry and information symmetry may be part of the answer to the problem at hand.”

Around 40 public sector firms, including Bharat Heavy Electricals Ltd and MMTC, responded to an EoI tender from the state government for setting up the 1,350MW power project and developing the coal mine at a combined cost of around Rs7,000 crore. According to the project proposal, the selected company was to form two separate joint ventures with the Chhattisgarh State Electricity Board (CSEB) and CMDC, respectively. In the first instance, CSEB would hold a 26% stake in the joint venture, while in the second, CMDC would hold 51% in the firm in keeping with government laws that mandate coal can be mined by any venture in which the government has at least a 51% stake.

Stalemate over Asarco bid; auction likely - Quoted in the Financial Express

The year-long tussle between mining giant Grupo Mexico and Sterlite Industries to buy bankrupt US copper miner Asarco seems to have reached a stalemate. Sterlite Industries, a subsidiary of London-listed Vedanta Resources Plc, on Thursday increased its cash component by another $500 million to nearly $2.1 billion, indicating that it was not willing to let go the deal easily. This is for the second time in less than 10 days that Sterlite has increased the cash component for Asarco.
Industry watchers say the end result could turn out to be an auction-like situation, where the bankruptcy court might consider an auction after evaluating the offers. “There does not seem to be an easy end to this and the deal seems to be heading to an auction-like situation,”said PwC principal consultant Dipesh Dipu. Agreeing to this possibility, Rahul Singhvi, an analyst with Sharekhan, said, “The auction-like situation is very much possible. However, it is very difficult to say how this deal would shape up.”
The current Sterlite's offer comes at a time when a bankruptcy court in Texas, US, is taking a final view of the two competing bids and is expected to handle the control of Asarco to one of the two firms soon.
Sterlite Industries' shares on Thursday were up 1.44%, to close at Rs 619.35 on the Bombay Stock Exchange. Sterlite had last week revised its offer to $1.59 billion in cash.
The revised offer of $2.1 billion in cash has now almost matched that of its rival Grupo Mexico's cash component. Grupo Mexico has reportedly offered a cash component of $2.2 billion in its bid to regain control over the target company.
Meanwhile, Sterlite has also proposed to support a plan of reorganisation that is intended to pay creditors in full their allowed amount of claims and full post-petition interest. All the other terms and conditions of the agreement remain unchanged, the company added. Sterlite had earlier said that it would not increase the bid any further as it was confident of winning it. Anil Agarwal, chairman of Vedanta, had claimed earlier that Vedanta would become the third-largest copper producer in the world if the Asarco deal goes through.
US-based Harbinger Capital, which was also in the race to acquire Asarco, has already withdrawn its $500-million offer and is reported to be supporting Sterlite's bid. Meanwhile, Vedanta has already claimed that its bid for Asarco is being backed by the US government and the trade union.

MMTC scraps controversial coal tender - Quoted in the Mint

State-owned trading firm MMTC Ltd has scrapped its controversial tender for the import of 12.5 million tonnes (mt) of coal valued at Rs6,000 crore for NTPC Ltd.
One of the bidders, Knowledge Infrastructure Systems Pvt. Ltd (KISPL), alleged foul play in the way the order was executed, and demanded an investigation into the procurement process and an intervention by the Prime Minister’s Office.
Other bidders for the 12.5-mt contract were Adani Enterprises Ltd and two consortia—Agarwal Coal Corp. Pvt. Ltd and Kowa Co. Ltd of Japan; and Dubai-based Coal and Oil Group (C&O), Coastal Energy Pvt. Ltd and Seapol Pvt. Ltd.
“We have scrapped the tender. We were given the option by NTPC to form the terms of the new tender, which we have done. This has now been sent to the commerce ministry for approval. We expect the approval to come shortly, post which we will float the tender any time shortly,” said a senior MMTC executive who asked not to be identified.
While an Adani group spokesperson declined comment, a KISPL spokesperson said: “With the scrapping of the tender, the whole sector will benefit in general and NTPC will benefit particularly because there will be fair competition, which will lead to a fair price. Before we make specific comments, we would like to see what the revised terms of the tender are.” The other two consortia could not be immediately contacted.
“We have discussed the issue in our board and have asked MMTC to follow the international competitive bidding guidelines along with those laid down by the Central Vigilance Commission (CVC). It is for them (MMTC) to ensure transparency. They will give us a certificate to the effect and even we will do our due diligence,” said a top NTPC executive who did not want to be identified.
CVC is the apex body that oversees the functioning of government departments and agencies on contractual issues.
“Going forward, we will directly source the coal from overseas producers,” the NTPC executive added.
Mint had reported on 5 August that NTPC, India’s largest power generator, planned to directly import the coal it needs, instead of asking state-owned trading firms such as MMTC and State Trading Corp. of India Ltd (STC) to import the fuel for it.
The change, which would have involved an amendment in internal rules, was prompted by the controversy.
The KISPL spokesperson had said in an earlier email that the conditions of the original tender were “against Central Vigilance Commission guidelines and standard public sector tenders” and that “the tender neither provides level playing ground for all the bidders nor does it seem to promote competition”.
Dipesh Dipu, principal consultant, mining, at audit and consulting firm PricewaterhouseCoopers, said the procurement policies of government entities should be transparent and treat all bidders equitably, and also be seen to be so and do so. “The delay in importing coal in this case may be considered as sacrifice for compliance with these principles.”
NTPC used 125 million tonnes per annum (mtpa) of domestic coal and 6.41 mtpa of imported coal in 2008-09. Indian coal has a high ash content, one reason why some domestic coal-based power plants mix it with higher quality imported coal.
The size of the market for imported coal that goes into power generation in India is around 20 mt a year, and is expected to double by 2012 as more thermal power projects come up.
Coal is critical for NTPC as at least 80% of its installed capacity of 30,644MW is coal based. However, a majority of its coal-based projects don’t have sufficient stock of coal.

Coal India plans a price hike of 11% - Quoted in the Mint

In a move that may impress investors ahead of its maiden public sale of shares but add to the costs of cement, power and steel companies, India’s largest coal miner has proposed an 11% increase in coal prices.
State-run Coal India Ltd, or CIL, argues its price hike will have only a marginal impact on inflation.
The price increase will net CIL an additional revenue of Rs4,629 crore and boost profits ahead of a public offer in the stock market.
“We see a price correction shortly and there should not be a problem,” said Partha S. Bhattacharyya, chairman of CIL. The company posted a profit of Rs300 crore on a turnover of Rs46,000 crore last year.
The weightage of coal in the Wholesale Price Index, or WPI, is 1.753%.
With the state-run CIL mining 84% of the coal produced in the country, an 11% increase will push up inflation by around 0.16%, the company said.
On 7 August, Mint had reported on the Union government plan to shortly approve a CIL proposal to increase the price of coal, a move that will directly affect cement, power and steel companies.
CIL is a holding firm under the coal ministry that contributes 85% of India’s coal output and is free to fix the price at which it sells the fuel, but only after prior approval from the government. The last coal price revision was in December 2007 and the latest revision is expected to partly bridge the price gap with international coal, which is about one-third higher.
Shriprakash Jaiswal, minister of state (independent charge) in the ministry of coal, did not respond to repeated phone calls and a message to his cellphone.
Any increase in prices of coal, a key input for most sectors, will have a cascading effect.
It will increase the price for coal to the power sector by Rs77 per tonne, which will work out to around 5 paise per unit of power generated; for the cement sector, the impact will be around Rs20 per tonne which will work out to around 80 paise on a 40kg bag, said Bhattacharyya.
Overall annual inflation, as measured by WPI, is still contracting and was -1.74% on 1 August. There is, however, a fear that inflation may bounce back later in the year, especially since food price inflation continues to be firm — the pressure will only worsen with the country declaring drought in 171 districts in the middle of its most important crop season, kharif.
The National Council of Applied Economic Research in its monthly report on 12 August said that the possibility of the inflation rate rising in the current fiscal cannot be ruled out.
“Rise in prices of basic raw material may have multiplier effect on inflation, apart from direct impact on the indices, which in recessionary time, may have adverse impact on the economy,” said Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers.
Crisil Ltd principal economist D.K. Joshi said: “The coal price increase will have an impact on energy-intensive industries. However, I do not see it as a major problem on inflation for the next couple of months. Going ahead, it will add to the cost of raw materials.”
CIL believes that the price hike will help CIL partly offset the increase in input costs, such as a higher wage bill on account of the Sixth Pay Commission, and thereby show a healthier balance sheet ahead of its proposed listing on bourses.
“That’s (listing) the idea. In declining profitability, who will invest? This will help us with our proposed listing,” said Bhattacharyya.
Indian coal (with a calorific value of 3,500 kilocalorie per kg) is priced at around $38 (Rs1,835) per tonne, around 30-40% lower than international prices.
India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) per annum is mined. CIL is targeting a production of 435 mt this year, against 403.73 mt achieved in 2008-09.
Demand for coal is expected to reach about two billion tonnes a year by 2031-32, about five times the current rate of extraction, with the maximum demand coming from the power sector.

Mining Engineering - Interview with Search Magazine

1. How do you decide on the feasibility of recovering the mineral deposit?

Feasibility of a mineral deposit is established mainly from technical and economic perspectives. Technical feasibility establishes whether a mineral deposit under consideration can be mined using available technology options including surface mining or underground methods, availability of appropriate sizes of equipment, safety and work environment requirements, availability of resources and such other parameters. Economic feasibility is established with a view on return on investments, break even volumes of production, pay back period and wealth creation. Another angle may be of legal permissibility, which establishes whether the law of the land permits mineral exploitation and allows usage as envisaged. An example for this could be how a coal block can be technically and economically feasible for a multinational mining company but may not be legally permissible since the regulation requires captive consumption of coal.

Sustainability of the mining venture needs to be assessed as well – from environmental and social perspectives. Without due consideration to sustainable development, the venture can fail in long run even when mineral deposits are technically and economically feasible and it is permissible to mine.

2. Please enlist the equipment necessary for mining?

Equipment for mining varies, depending upon mining method chosen. In the surface mines, the major heavy earth moving equipments currently used are rope and hydraulic shovels, draglines, dumpers and drills. The surface miners are also used where the ore is relatively soft, for example, for coal and limestone. The lignite mines have been using bucket wheel excavators for mining in conjunction with flexible conveyor transportation systems. Aside these production equipment, there are auxiliary equipment like dozers, water sprinklers, motor graders, and several others.

Underground mining methods usually employ side-discharge-loaders (SDLs), load-haul-dump (LHDs) machines, drill jumbo, continuous miners, raise borers, shaft sinking equipment, haulage tubs and others. Longwall coal mining methods employ shearers, armored face conveyors (AFCs), powered supports, road headers, and others. The auxiliary equipment for underground mining is used for rock bolting, water pumping, ventilation and safety.

3. What are the technological advancements taking place as far as manufacturing equipment are concerned?

With large sized surface mines planned and the level of mechanization already improving, the equipment sizes are going to be larger. Currently, rope shovels of sizes 4.5 to 20 cubic meters are common in Indian coal mines, but larger production capacities in deeper and higher stripping ratio mines will necessitate use of 55 and 70 cubic meter shovels. Matching the size of shovels, the dumper capacities are also expected to be 240 and 360 tonnes. Surface miners are useful for selective mining and have improved control on quality and eliminate the processes of drilling and blasting. They have used in Thalcher area of Mahandi Coalfields Limited for coal winning and for limestone mining in Gujarat Ambuja Mines.

Longwall technology for coal promises high productivity and coal recovery (more than 75%) but the technology does not have a good record in India. Apart from lower than expected production and productivity, there have been failures at Charcha and Kotadih mines. Several factors have contributed to these, including geo-mining conditions, hard roof strata, compatibility with other equipment, lack of adequate maintenance systems and lack of trained staff. The technology has been quite successful in several countries, particularly so in China, where about 90% of the annual production of around 2 billion tonnes per annum comes from underground mines.

The advancement in technology is directed towards greater flexibility, better safety features and larger capacities. On all these fronts, the mining equipment industry has made good progress.

4. Are you satisfied with the kind of equipment available today? (Please give an elaborate response)

There are wide ranges of equipment available today to meet new geo-technical challenges. However, every mineral deposit is unique and may challenge the engineers. Hence, the research and development efforts are on. The key to success of a mining venture is to involve equipment suppliers as partners in mine planning and design. This may result in nuts and bolts type of innovation in mining technology and equipment quite often, and breakthroughs in some cases. By and large, the advancement in mining equipment is satisfactory. Although in Indian context, we hear about technology failures and low productivity and efficiency of equipment, which, however, may be resultants of wrong technology selection, lowest-bidder procurement policies, poor maintenance practices, sub-standard spare parts and replacements.

5. Is the government providing enough safety gear for mining engineers?

Government has provided the legal and regulatory framework for safety of engineers and workmen, and for prevention of occupational diseases. Every mining project is bound to comply with these. Directorate General of Mines Safety, a regulatory arm of the Ministry of Labour, is entrusted with the responsibility of ensuring compliance with safety rules and regulations. By and large, these provisions have been effective in ensuring lower levels of safety breaches and fatalities. The safety standards in Indian mines can be higher provided the implementation of safety regulations is not compromised. It must be appreciated that loss of life, production, working hours and trust heavily overweight any compliance cost, and safety culture needs to be built in our industry practices.

6. What is your wishlist as a mining engineer to improve the conditions of working and the gaps that are present today?

I wish mining engineers were better paid! Mining has risks that not many professions have but the compensation structures of mining engineers do not always reflect this.

Shortage for human resources is likely to be one of most critical factors for mining industry. The lack of skilled resources is caused by a number of factors, including an ageing workforce, a levelling of number of labour entrants into the industry, a steady number of people exiting the industry. Currently, young talent may not be particularly attracted to the resources or minerals industry for a number of reasons. Although the opinions are divided but most of the mining graduates consider brand value and remuneration offered by a company as the two most important factor for accepting a job offer from a mining company. Mining companies need to address these needs and market their employment as those with potential for innovation and daily challenges. Reward is often looked at as only monetary payments; however it should be approached from a “Total Reward” perspective, including nature of work, projects, and relationships.

Lack of social life and remote location are the two most important factors which make career in mining industry an unattractive option. The difficulty in balancing work and family life forces mining engineers to explore and choose alternative career options. It may be surprising but some of the mining engineers and industry leaders acknowledge that mining engineers find getting a good life-partner difficult due to the work location.

It is appreciated that minerals occur where they do. But the industry may do well to provide for improved social affiliation, creation of facilities for recreation, create facilities for providing support to families, create vocational opportunities for spouses and family members and support them in their endeavours, and such other steps that may make stay at mine locations comfortable.

ICVL may buy stake in US coal producer - Quoted in the Mint

International Coal Ventures Pvt. Ltd (ICVL), a company set up by five state-owned firms, is in talks with a leading coking coal producer in the US for acquiring a stake in the company as a precursor to accessing mining concessions in that country.

ICVL, owned by NTPC Ltd, Steel Authority of India Ltd(SAIL), Coal India Ltd (CIL), Rashtriya Ispat Nigam Ltd(RINL) and NMDC Ltd, is being advised on the transaction, code-named “Project Roy”, by Giuliani Partners Llc, a management consulting business founded by former New York City mayor Rudolph Giuliani.

“We are talking to Giuliani Partners. This coal company is one of the major coking coal producers in the US and is looking for investors,” said a senior CIL executive, who asked not to be identified given the sensitive nature of the issue. He also declined to name the US firm.
SAIL chairman S.K. Roongta didn’t deny the move, but said unless there was something “specific” to share with the media, he couldn’t talk on the subject. Questions emailed to Giuliani Partners on Tuesday remained unanswered.

There are around six leading coking coal producers in the US. These are Consol Energy Inc., Massey Energy Co., Peabody Energy Corp., Walter Energy Inc., Arch Coal Inc. and PinnOak Resources Llc.

While PinnOak couldn’t be contacted and an Arch Coal spokesperson declined comment, questions emailed to the other four firms on Wednesday remained unanswered.
ICVL executive Ajay Mathur did not respond to phone calls and to a text message to his mobile phone. ICVL’s mandate is to acquire coal mines abroad.

India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) per annum is mined. CIL is targeting a production of 435 mt this year, against 403.73 mt achieved in 2008-09. India imports around 40 mt of coal. Demand is expected to reach around 2 billion tonnes a year by 2031-32, around five times the current rate of extraction, with most of it coming from the power sector.

“India does not have substantial good quality metallurgical coal reserves and hence it is prudent to acquire such assets abroad, more so in light of volatility in prices. However, acquiring equity stakes may address supply security concerns in terms of assured quantum, but may not necessarily shield the acquiring company from pricing shocks,” said Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers. “Cannibalizing target company’s profits for the Indian end-user company may not go down well in the era of shareholders’ interest unless the target company is acquired fully,” he added.

Battle for Asarco evenly poised between Grupo and Sterlite - Quoted in the Financial Express

With market capitalisation of close to $12.1 billion and a total revenue of about $67.7 billion, Grupo Mexico can not be considered less strong a competition to Sterlite Industries, who is currently leading the fray to buy bankrupt US copper miner Asarco.
The year-long tussle between mining giant Grupo Mexico and Sterlite Industries, a subsidiary of London listed Vedanta Resources Plc, is at its final stage in the Texas court.
Experts believe, Grupo Mexico has bid at fairly competitive price, and, hence, the battle for Asarco seems evenly poised.
However, Grupo Mexico may have a disadvantage due to the litigation against it's acquisition of Peruvian mines of Asarco. Hence, the management of Asarco may favour Sterlite more than Grupo Mexico. Also, the group of creditors favours Sterlite.
Grupo had bought Asarco in 1999 for more than $2 billion and then established Americas Mining as Asarco's parent company. At the time of the acquisition, Asarco's "crown jewel" had a 54% stake in Southern Peru Copper Corp (SPCC), which operates two Peruvian copper mines. In March 2003, Grupo Mexico had Asarco transfer its 54% stake in SPCC to Americas Mining for $747 million.
Asarco's business then saw a quick decline and filed for Chapter 11 bankruptcy protection in 2005. In February 2007, Asarco filed an adversary lawsuit in the District Court on behalf of its creditors against Grupo and Americas Mining. Despite all this, the question that arises is what is making Grupo Mexico so aggressive for Asarco?
Dipesh Dipu, principal consultant, PwC said, "The AMC litigation itself has close to $7 billion claim, and if Grupo acquires Asarco it will not have to be paid. This chance of an amicable settlement of liability may have led to Grupo's aggression." On the other hand, Vedanta is positive of winning the bid. With cash in hand of about $6-7 billion, Vedanta is targeting to be among the top five metal producers in the world.
"The long drawn battle in bankruptcy court can be shortened through an auction like mechanism with a clearly defined mechanism to evaluate counterbids. Both Grupo and Sterlite may have to wait and watch each other's moves till the court decides conclusively," Dipu added.

Panel being set up to expedite acquisition plans of Coal Videsh - Quoted in the Mint

India’s efforts to line up coal supplies to fuel its future needs of energy could soon receive a fillip with the coal ministry proposing the creation of a committee of bureaucrats to sign off on the acquisition plans of Coal Videsh Ltd, a move that will likely speed up a process that currently requires the clearance of the cabinet.
Coal Videsh is a wholly-owned subsidiary of the state-owned Coal India Ltd that aims to acquire coal mines in other countries.
The creation of the committee of secretaries, however, needs to be approved by the cabinet committee of economic affairs and the coal ministry is working on this, said Coal India chairman Partha S. Bhattacharyya.
Coal Videsh plans to buy coal mines in Mozambique and is also looking to acquire mines also in Zimbabwe, Australia, Bangladesh and South Africa. Coal secretary C. Balakrishnan was on leave and could not be reached for comment. A message left for special secretary S.P. Seth in the coal ministry remained unanswered.
Coal Videsh is also in talks with global coal firms such as Peabody Energy Corp. and Anglo-Australian miner Rio Tinto for a strategic alliance to mine coal in Australia, the US, South Africa and Indonesia.
While these alliances will help Coal India get a global footprint, they will also help the overseas firms prepare for the opening up of the Indian coal mining business. Coal Videsh has asked for expressions of interest from foreign firms in this regard; the last date for submission is 17 August.
Questions emailed to Peabody Energy and Rio Tinto on 9 August remained unanswered.
“The ability to quickly close a deal when opportunity knocks at the door will be the key success factor for those looking to acquire mineral assets abroad,” said Dipesh Dipu, principal consultant, mining, at audit and consulting firm PricewaterhouseCoopers. He added that the global financial crisis had shown itself capable of knocking out big names from the race for coal assets, thereby presenting Indian firms with an opportunity to acquire these.
Coal India is keen to acquire stakes in overseas coal mines to bridge the gap between demand and supply in the local market, even as coal production in India continues to slow. This will also protect the firm against volatility in international prices of coal. India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) is mined every year. Coal India is targeting a production of 435mt this year, against 403.73mt achieved in 2008-09. India imports around 40mt of coal. Demand is expected to reach about 2 billion tonnes a year by 2031-32, about five times the current rate of extraction.

(Published on 11th August 2009)

NTPC looks to bypass state trading firms on coal import - Quoted in the Mint

India’s largest power generation utility, NTPC Ltd, may directly import the coal it needs, instead of asking state-owned trading firms such as MMTC Ltd and State Trading Corp. of India Ltd (STC) to import the fuel for it.
The move, which could affect revenue from coal imports at these trading firms, is a fallout of a controversy surrounding MMTC’s execution of an order to import a record 12.5 million tonnes (mt) of coal valued at Rs6,000 crore for NTPC. That order is now stuck.
One of the bidders for the tender, Knowledge Infrastructure Systems Pvt. Ltd (KISPL), has alleged foul play in the way this order was executed, and has demanded an investigation into the procurement process and an intervention by the Prime Minister’s Office.
NTPC could reduce its coal import bill through direct imports that do not involve paying a commission to the trader. This could mean proportionately lower power generation costs and, consequently, lower tariffs.
“We plan to operationalize this sourcing mechanism by the end of this year and we are in talks with overseas coal mining firms in Indonesia and Australia for the same,” said a top NTPC executive who did not want to be identified. “We are aware about the controversy surrounding our 12.5mt coal contract with MMTC over which questions have been raised from some quarters.”
NTPC has a coal import policy in place and can only import coal through state trading firms such as MMTC and STC. This policy will need to be changed should NTPC want to import coal directly.
In an email communication, KISPL’s spokesperson voiced two concerns about the controversial 12.5mt contract. The first is NTPC’s use of an intermediary because this will lead to a mark-up in the imported cost of coal. “Since fuel cost is a pass-through, this additional cost is passed on to citizens in the form of increased power tariff and, hence, the process should be discouraged,” wrote the spokesperson.
The second has to do with the conditions of the import tender which the spokesperson claims are “against Central Vigilance Commission (CVC) guidelines and standard public sector tenders.” “The tender neither provides level playing ground for all the bidders nor does it seem to promote competition, which is the main basis behind public tenders.”
CVC is a government entity that serves as a sort of conscience keeper for state-owned companies.
Other bidders for the 12.5mt contract are Adani Enterprises Ltd and two consortia, Agarwal Coal Corp. Pvt. Ltd and Kowa Co. Ltd of Japan; and Dubai-based Coal and Oil Group (C&O), Coastal Energy Pvt. Ltd and Seapol Pvt. Ltd.
“The controversy has been raised as there is a conflict between various competitors. There is a divergent view on the qualification criteria between CVC and NTPC. We are stuck there. We have communicated to NTPC that either you get these qualification criteria cleared by the CVC or we get an approval from our board,” said a senior MMTC executive who did not want to be identified.
The same MMTC official maintained that NTPC’s decision to bypass a trading firm will only have a minimal impact on its turnover. “We are not regularly importing coal for NTPC. The last time we imported coal for them was in 2005-06—2.1 mt. I will not say that it is a loss of business as it is an additional business we are looking for. It is NTPC’s prerogative whether they want to do it through a trading company such as ours or themselves,” he said.
MMTC posted a net profit of Rs1,654.42 core on a turnover of Rs36,904.62 crore in 2008-09. Of this, revenue of Rs2,724 crore came from the coal business. The firm imported 3.7mt of coal in the last fiscal for state utilities. Mint could not immediately ascertain the share of NTPC in the state trading firm’s coal import business in previous years.
The size of the market for imported coal that goes into power generation in India is around 20mt a year, and is expected to double by 2012 as more thermal power projects come up.
Coal is critical for NTPC as at least 80% of its installed capacity of 30,644MW is coal-based. However, a majority of its coal-based projects don’t have sufficient stock of coal. NTPC used 125 million tonnes per annum (mtpa) of domestic coal in 2008-09 and 6.41 mtpa of imported coal. Indian coal has a high-ash content, one reason why some domestic coal-based power plants mix it with higher quality coal that is imported.
An Adani Group spokesperson could not be reached for comment and questions mailed to his email address bounced back. Questions emailed to the firm remained unanswered.
A consultant said that intermediaries usually add to the cost unless they can aggregate demand and get better bargains in the international market. “That, however, may not be the case with some of the larger utilities in India,” said Dipesh Dipu, principal consultant, mining, at audit and consulting firm PricewaterhouseCoopers,
India has known coal reserves of 255 billion tonnes, the fourth largest in the world. Coal accounts for at least 50% of India’s commercial energy consumption and around 78% of domestic coal production is dedicated to power generation.

(Published on 5th August 2009)

Ahead of listing, CIL may hike coal prices - Quoted in the Mint

New Delhi: In a move that may have a cascading impact on inflation, the Union government may shortly approve a proposal of state-run Coal India Ltd (CIL), the country’s largest coal miner, to increase the price of coal—a key raw material for companies in the business of cement, power and steel.
If accepted by the government, the price hike will help CIL partly offset the increase in input costs, such as a higher wage bill on account of the Sixth Pay Commission, and thereby show a healthier balance sheet ahead of its proposed listing on bourses.
Shriprakash Jaiswal, minister of state (independent charge) in the ministry of coal, has said several times in the past two months that the government is considering divesting up to 10% stake in CIL.
CIL is a holding firm under the coal ministry that contributes 85% of India’s coal output and is free to fix the price at which it sells the fuel. However, this needs to be approved by the government. The last price revision was in December 2007. Currently, domestic coal is priced around 30-40% cheaper than international coal, depending on its quality.
“We have gone through a huge revision of pay and perks of our 410,000 executives and employees on account of the Sixth Pay Commission, on account of which we have to bear an additional burden of Rs4,000 crore per annum. Based on current prices, this will significantly hit our bottomline. There is a need for an increase, which will be modest. The PMO (Prime Minister’s Office) is closely involved in the exercise. It should not take too long,” said Partha S. Bhattacharyya, chairman of CIL.
The pay commission is a government body that defines the pay of government staff.
An increase in price would also give CIL’s profit and loss account a makeover. “We posted a profit of only Rs300 crore on a turnover of Rs46,000 crore last year, which is not good, keeping in mind our plans for a listing,” Bhattacharyya added.
Jaiswal was away on a trip to Kanpur. He did not respond to repeated phone calls and a message to his cellphone. A message left for coal secretary C. Balakrishnan in his office also remained unanswered.
India’s apex planning body, the Planning Commission, has also favoured an increase in the price of domestic coal in an effort to bring this on a par with international coal prices.
“There is a need for a coal price hike,” B.K. Chaturvedi, member, Planning Commission, had said in July.
Any increase in coal price will have a cascading effect, as consumers are likely to pass it on. That could increase inflation. Wholesale prices in India fell for an eighth week, declining 1.58% in the week to 25 July from a year earlier after falling 1.54% in the previous week, the government said on Thursday. However, there is fear in some quarters that a revival in growth could be accompanied by higher inflation.
“The price increase in coal will increase the cost of power. The price of power for the consumer will increase. CIL is saying that due to the wage revision, they will have to increase the price,” said R.S. Sharma, chairman and managing director of NTPC Ltd, India’s biggest power generation utility. Utilities such as NTPC simply pass on the cost of fuel to consumers.
Indian coal (with a calorific value of 3,500 kilo calorie per kg) is priced at around $38 (Rs1,809) per tonne, around 30-40% lower than international prices. In 2008, before the onset of the economic slowdown, prices in global markets spiked and the difference between these and the price of Indian coal was as high as 55-60%.
“CIL’s push for higher prices may appear justified in light of the inflated employee costs and the resultant prices may still appear lower than the comparable international coal prices, but such price hike may lead to input cost escalation for power (plants), steel (makers) and other consumers,” said Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers.
“CIL’s IPO (initial public offering) may enhance accountability and transparency in the company, and increase the capital market depth for mining investments. While the government may look at unlocking value in the company ownership, a listing may help investors and other stakeholders get a better view of CIL’s operations,” he added.
India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) per annum is mined. CIL is targeting a production of 435 mt this year, against 403.73 mt achieved in 2008-09.
India currently imports around 40 mt of coal. Demand is expected to reach about 2 billion tonnes a year by 2031-32, about five times the current rate of extraction, with the maximum demand coming from the power sector.
(Published on 7th August 2009)