Innovation focus holds the key - My article in the Mint

Indian metals and mining industry is competitive if their financial performances are to be considered the key determinant. For example, while the global mining industry has had a history of 15-20% net profit margins in the last five years, the best being 26-27% during the boom times of 2007-08, Indian miners had their margins upside of 35%. Similar performance is observed in total shareholders’ returns. Metals companies with captive mines have also performed better than their global peers and in some cases Indian companies have set the benchmark for low cost production. However, this does not bring much cheer when the underlying factors are analysed. Competitiveness of Indian mining sector is primarily factor-driven and that of metals sector, to a certain extent, efficiency driven. Low cost labour has been the fulcrum of this competitiveness. There have been nuts and bolts type of innovations which have led to extended useful lives of equipment, but none that can qualify innovation as driver of the competitiveness.


Unfortunately, lower environmental and social compliance costs have also been the reasons for current level of high competitiveness for the industry. However, if the recent events are any indicators of future policy and legislative initiatives, the cost of sustainable development for mining and metals projects are likely to rise substantially. While sustainability does find mention in the annual reports of most market participants in the industry, there is vast gap in the letter and the spirit. The world is moving towards formation of alliances, where environmental and human rights standards will determine international trade. In such a case, the industry will have to abide by global commitments and adopt a change in its managerial approach if it has to maintain a social license to operate and still remain competitive.

The industry participants need to focus on efficiency and innovation. In the metals and mining industry, the efficiencies and utilizations of physical and financial resources are lower than global peers. For example, large pools of cash and cash equivalent on the balance sheets of the miners even in light of severe gap between the demand & supply and lucrative pricing for most raw materials, indicate underutilization of funds. The number of foreign assets acquired by the Indian companies compare poorly with the aggressive resource pursuit of the Chinese. Hatching cash will lead to costlier access to raw material sources later and erode competitiveness.

Mining sector that has been dominated by the government owned companies, has had easy access to reserves and has focussed on shallow deposits extracting them by surface mining methods. Both deeper resource bases and environmental concerns will force the industry to go largely underground. Technology adoption will not be an option. The relatively more efficient metals sector too has realized the need for technology improvements and the same is reflected in the spate of joint ventures formed with Japanese and Korean manufacturers. The metal sector too has been clamouring for captive mines, duties on ore exports, lifting of import duties on raw materials, and such other fiscal incentives from the government. Some of these may be justified to keep the Indian metal products competitive, but a hard look at the resource optimization and process improvements may do the sector long term good.

Competition has been skewed in the metals and mining industry. The statutes and policies have kept competition at bay from the large government owned companies. Foreign miners have been waiting in wings eternally for entry in lucrative coal and iron ore mining. In coal mining, for example, the captive mining rules have led to inexperienced power generation companies, many of them being state-owned financially weak utilities, getting coal blocks. This has led to sluggish development of coalmines. Recently approved competitive bidding process for resource allocation is likely to result in transparency but will keep the degree of competition low until the restriction of captive consumption is abolished. Large number of participants with no restrictions on fair transactions will help large scale private and foreign investment and help build global competitiveness. The enactment of Coal Mines Nationalization Amendment Bill 2000 may be a step in that direction. There certainly is need for formulation of policies in metals and mining industry that rise above the din of the present and now, and that create freer markets and level playing fields for government-owned, private and foreign entities to attain long term competitiveness for the industry.

The metals and mining industry can be truly competitive in long term given the large pool of natural resources, higher entrepreneurial spirit, healthier financial position and availability of talent. Industry, however, needs to focus on innovation, even in cost leadership; to be agile enough to adopt stringent sustainability standards and to respond to opportunities that nation’s high economic growth present.