Corruption in Indian Mining - My article on Novamining blog

The corrupt practices in the mining sector haven’t got so much of an attention that they deserve. Off-late, however, the illegal mining and their impact have made news headlines. While we still hear of numbers in terms of losses to state revenues and depletion of natural resources, a well directed effort to curb the root cause of the menace is still not heard of. The reason quite clearly is the influential groups with vested interest that wouldn’t want any other script for their play.

Iron ore sector in Orissa has seen growth of illegal mining since the time iron ore prices hit the upward trend. Even with the global downturn, the cost of production was paltry when compared to international prices of ores. The national and state owned enterprises have earned huge profit margins in iron ore business. So, it is not very difficult to imagine the margins of the illegal miners, who for sure are not complying with safety norms, environmental standards or minimum wages rules. These huge margins are also likely to find their way into the pockets of those who are expected to keep laws complied with.

Illegal mining has been prevalent in coal sector as well. In the Indian context, coal mafia has been known to conduct illegal mining and are sometimes observed to control even the transportation system from the authorized coal mines. Although not strictly mining but illegal activities have been observed in the distribution of coal through the coal washery networks. All of these activities are certain to have so much money involved that none dares to enforce law.

As such there has been the problem with legislations, policy-making and drafting of rules and regulations in mining sector, which are archaic, skewed and inefficient, and lead to making opaque transactions economically attractive. These convoluted laws, for example the captive mining rules for coal, coupled with acute shortages, create demand for coal or ores such that cannot be met through legal channels. The rules of game are so labyrinthine that law-abiding companies find it challenging to get the required approvals and clearances, and operationalize their mines. So, for the unscrupulous entrepreneurs, illegal mining appears to be the way to go.

Well, the solution for this is simple, although the implementation is extremely difficult. The market needs to be aligned to fair and transparent transactions – in mining assets and in commodities that these mines produce. The rules of the game have to be simplified so that a law-abiding and honest firm does not get deterred and investments flow through the legal channels. With greater participation from the private sector, facilitated by level playing field, even the shortages can be addressed effectively. Also, the penal provisions for illegal mining and the judicial system that trigger these provisions need to be aligned with the modern era. Exemplary speed in dealing with illegal mining and equally exemplary penalties for these offences may help deter the tendencies to look for the unfair means.

But for all this to happen, we indeed need political will; supported by efficient and effective executive; and fair and swift judiciary. The big question then is will India ever get these.

Teaming up with Nippon will help the steel major to cater to the Indian auto steel market - Quoted in the Financial Express

Tata Steel may have gained a European presence by acquiring Anglo-Dutch steel major Corus, but that may not help it cash in on the big market for automotive steel at home. "Corus produces steel products for the European car industry, but they are not suitable for Indian market conditions. Tata Steel has not been able to leverage its European experience with high-end products for the Indian operations," notes Motilal Oswal.

Which is probably why, Tata Steel decided to collaborate with Japanese steel giant Nippon Steel. Otherwise, it may not have been able to cash in on the growing demand for steel from the automotive industry at home. The idea was to be able to produce high quality, continuous annealed cold-rolled sheets to cater to the needs of the Indian auto market. And the best way to do this was to team with the Japanese who remain, without doubt, among the leaders in the automobile steel space.

Industry watchers are of the view that Tata Steel has worked with Nippon before, and given the relative strength of the Japanese in automotive products, it may be a good strategy to set up a new joint venture with it. The primary reason cited for Corus acquisition, on the other hand, was to access the European markets. To that extent, the strategic options exercised by Tata Steel appear complementary.

Says Dipesh Dipu, metals expert, "India has been stated to be an automotive hub in the making. With low-cost labour and possibly, captive raw material sources, setting up an automotive steel product manufacturing facility makes perfect sense, complemented well by the know-how of one of the largest manufacturers in the world. Also, considering that the Tata Steel seems financially a little stretched due to the Corus acquisition, a joint venture may be the best way forward," he adds. In other words, Nippon brings to the table its automotive product technology to complement Tata Steel's efficient and low-cost manufacturing base in India. Meanwhile, Corus has a strong reach across Europe and Tata Steel's iron ore and metallurgical coal sources would be available to it. Also, Tata Steel will be able to access the lucrative European market, which was always the intention.

Demand for steel in India is expected to grow in double digits over the next three to four years, and it's possible there won't be enough local supply to meet this demand. One reason for this is that a couple of major greenfield projects have not been able to take off mainly because of land acquisition problems. Moreover, following the slowdown in industry in 2009, producers were reluctant to add capacity, given that they were already highly leveraged. As such, brownfield expansions, too, have slowed down. The shortage of supply may keep steel prices firm and allow steelmakers in India to command premium valuations, relative to global peers.

But in Tata Steel's case, analysts are closely watching the performance of its subsidiary Corus. The world's eighth largest steel manufacturer reported a consolidated net profit of Rs 470 crore after three consecutive quarters of losses. The strong performance was led by a turnaround in its European operations, which reported an Ebitda (earnings before interest, tax, depreciation & amortisation) of $142 million, driven by a better product mix, higher realisations (+6% quarter-on-quarter) and cost savings of $104 million. Moreover, capacity utilisation at Corus improved sequentially to 81% from 75% in the second quarter. "We are finally coming out of recession in Europe but growth rates are barely 1-2%," observes Kirby Adams, Tata Steel's chief executive of its European operations.

The company's consolidated net sales during the December 2009 quarter, at Rs 26,100 crore, are up 3% quarter-on quarter, driven by an increase in steel prices. Macquarie notes that Corus reported an Ebitda of $37 per tonne during the quarter, compared with a loss of $52 per tonne in the September 2009 quarter. Going ahead, the company could increase prices, especially for flat products, and continue to focus on cost reduction. Tata Steel has also announced that it will be mothballing its Teesside operations at the end of this month which, experts say, is a step in the right direction for the sustainability of Corus' operations. But there's pressure from higher input costs. Observes Adams: "We are seeing pressure from our raw material suppliers to pay them more and there's a possible cost-push from raw materials this year. It is impossible for us to forecast what might happen to raw materials"

According to KirbyAdams, industrial capacity utilisation has hit a low of around 70% in the United States and Europe, and there is still a lot of unutilised capacity in the manufacturing and steel sector in Europe. But Goldman Sachs, surprised by the pace of the recovery, expects Tata Steel Europe to report a positive ebitda in the March 2010 quarter led by cost savings and higher realisations.