The domestic mining landscape is staring at a major disruption when an estimated 329 mining leases expire and need to be auctioned at the end of this fiscal. The tardy progress of auctions so far indicates the changeover could be very messy.
In his own way, Maruti Chari, 61, is more popular in Usgao, a little village in North Goa, than the local corporator. While the place derives its name from the local word for sugarcane, its major industry and source of employment is iron ore mining. Chari is renowned in the area as the doctor of trucks - he can diagnose any problem in a truck merely by sitting in it and driving for 100 metres. His 41-year-old truck repairing centre on National Highway (NH) 748, which connects Belgaum in North Karnataka to Panjim, is one of the landmarks in the area.
But his business took a major hit when the transport business in the area dwindled in the aftermath of a complete ban on mining in Goa in March 2018. Having somehow endured for the last 18 months, Chari says he would have no option but to shut shop and lease out the land if mining isn't restored by December. "I used to get 50-60 trucks for repair every day. Now I hardly get any," he says. "Till 2015, I employed 50 people. Now, it's down to just four. My earning has dropped from Rs 5 lakh per month to just Rs 10,000-12,000. At this rate, I won't be able to survive much longer. I am just about holding on till December."
Chari is an example of how the slowdown in the domestic iron ore mining industry is impacting those who are not directly involved in the business. Those who are, are even worse off. Santosh M. Thambi, 39, is staring at bankruptcy after he lost his job as a machine operator with Chowgule and Co. After losing his Rs 30,000 a month job with a local miner, Yeshwant R. Satgaonkar often gets suicidal thoughts. Similarly, Sandeep M. Nirlekar, the sole bread earner in a family of five, has already defaulted on a personal loan after losing his employment.
More than 1,00,000 people have been rendered jobless after mining came to a standstill in Goa following the Supreme Court decision in March 2018 to quash 88 leases.
The introduction of auction mechanism as the sole way to allocate mines after the Mines and Minerals (Development and Regulation) Act was amended in 2015, is likely to usher in a Goa-like disruption in iron ore mining across the country. Already in place for new mines, the Act will be applicable for a large chunk of existing mines, more than 300, from the start of the next fiscal year in April. Out of these, 48 are operational mines comprising various minerals - iron ore, manganese, bauxite, limestone and chromite.
The auction process in India is hardly smooth and there will invariably be a period of shutdown before bidding is done, ownership changes hands and the prickly process of obtaining fresh statutory environment and forest clearances is complete. The fear of disruption is real and the biggest impact would be on iron ore where 24 operational mines accounting for production of over 60 million tonnes per annum will be affected.
"We are staring at a huge employment loss due to expiry of the tenure of 329 non-captive mining leases on March 31, 2020. Out of these, 48 are working mines. The closure of these mines will hit production of 50-60 million tonnes of raw material, mainly iron ore, and is expected to result in loss of about 2,64,000 jobs, direct and indirect," says R.K. Sharma, Secretary General, Federation of Indian Mineral Industries (FIMI).
The effect on the domestic steel industry, which is the primary consumer of iron ore, will be significant.
In the Dumps
As one of the six largest iron ore-rich states in India, Goa may be the worst-hit, but it is not the only one. Mining is in the doldrums across India. The sector's contribution to GDP has fallen from 1.93 per cent in 2012/13 to 1.53 per cent in 2017/18. This is much lower than the 7-7.5 per cent level in similar mineral- rich countries like Australia and South Africa. Iron ore, which accounts for over 63 per cent of the metallic mining industry, has contributed majorly to that.
Like Goa, Odisha and Karnataka have also faced intermittent bans on mining from courts in the last eight years. In 2011, the Supreme Court had banned all mining in three of the richest iron ore bearing districts of Karnataka - Bellary, Chitradurga and Tumkur - for dumping and encroachment of land beyond the respective lease area in 166 mines. Then, in 2014, mining in 102 mines in Odisha was stopped by the apex court for violation of production limits at the pitheads.
"India's mining industry is in chaos. In the past decade, many mines have been closed or suspended due to judicial intervention in different regions of the country," says Sharma of FIMI. "As a result of the ineffective regulatory mechanism and subsequent adverse decisions by the Hon'ble Supreme Court in various states, the mining sector has been crippled and mines have either shut down, as in Goa, or working at a reduced level, as in Karnataka, Odisha and Jharkhand. Around two lakh people directly employed in these mines have lost their livelihood. It has also affected the indirect livelihood of a population 10 times the directly employed."
The disruption in Goa did not impact the domestic steel industry much as all the ore from the state was being exported largely to China, but the bans in Karnataka and Odisha created a shortage of ore in the country, forcing non-captive steel makers like JSW to import from Australia and Brazil. In 2014/15, import of iron ore hit an all-time high of over 12 million tonnes, as production of ore in the country hit a decade low of 128 million tonnes.
Other factors have played a role, too. High taxation, poor policy implementation and widespread red-tapism have stymied the potential of the industry. The effective rate of taxation in India for existing iron ore mines is a high 58 per cent. For new mines that are being auctioned, it is 54 per cent. It is significantly higher than the global rates that range between 31 and 45 per cent. The slowdown in the economy at large has not helped either as steel and iron ore prices have remained depressed, reducing the margins of the industry and restricting its ability to either invest in new technology or for expansion.
Prahlad Joshi, Minister of Mines
Overall, iron ore production has not kept pace with the growth of crude steel production in the country over the last decade. While steel production has grown from 57 million tonnes in 2008/09 to over 106 million tonnes in 2018/19, making India the second-largest steel producer in the world, production of iron ore has been inconsistent, hitting a high of 218 million tonnes in 2009/10 to a low of 128 million tonnes in 2014/15.
This despite the fact that India is the world's fourth-largest iron ore producing country. It also has the third-largest reserves of iron ore. The lapse of 24 mining leases in April 2020 is expected to usher in a fresh round of disruption, causing a demand-supply mismatch.
"The mining industry is already facing disruption in terms of low supply. Our domestic mining techniques are not as modern as they need to be. Private companies have still managed to adopt some cutting edge mining techniques but the public sector companies, which account for bulk of the mining in the country, have not been able to invest that much. So productivity levels have been well below the world average and our mine yields are not that high," says Urvisha Jagasheth, Research Analyst, Care Ratings. "Further, there is an economic slowdown, so most companies are refraining from mining a lot because they are not getting the kind of realisations they expected. The leases that are lapsing in March 2020 will only add to this," she adds.
The Auction Regime
For long, the iron ore mining industry has been plagued by rampant corruption and flouting of norms. The auction route was brought in by the NDA government at the centre in its first stint in an attempt to bring in transparency in the system. It has, however, brought in its own set of challenges. The key issue of delays in getting statutory approvals - 142 clearances are needed to get a mine operational, and it takes three-five years to do so - has not been addressed yet. Getting a mine off the ground has only become messier.
Sample this. Between 2010 and 2014, 494 mining leases were granted but post-auction (2015-2019), of the auctioned 42 greenfield mineral blocks, none of the leases has been executed. So far, leases have been executed only in case of four mineral blocks out of the 14 'C' category mines auctioned in Karnataka which had pre-existing environment and forest clearances.
R.K. Sharma, Secretary General, FIMI
The situation is expected to become more acute in the first half of next year when hundreds of mines in the country come up for bidding.
"The auction is an unnecessary and costly way of developing mineral resources and leads to delays in mining. It creates artificial scarcity in the economy and removes the opportunity to create new job opportunities," says Sharma of FIMI. "It is a fact that the auction mechanism for grant of mineral concessions has not given the desired result in the last four years. Without mining, the government's aim to make India a $5 trillion-economy is in the realm of astrology," he adds.
The government, however, has made it clear that there would be no rethinking on auctions as such. But in the last few weeks it has taken steps directed at ensuring a smooth transition next year. In late-September, the Mineral (Mining by Government Company) Rules, 2015, were amended to ensure that Donimalai, one of the biggest mines owned by India's largest miner, state-owned National Mineral Development Corporation, is not put up for auction. NMDC is now tipped to get a 20-year extension for the mine which has a capacity of seven million tonnes.
Further, the government has allowed state-run Steel Authority of India (SAIL) to sell 25 per cent of iron ore produced from its captive mines - it was not allowed to do so earlier - as also dispose old stock of about 162 million tonnes of low-grade ore lying at its pitheads across the country. While the low-grade ore may not be of much use to the industry, SAIL has the capacity to enhance iron ore production from its 20 captive mines by around eight million tonnes in 2019/20 and 12 million tonnes by 2021/22. If that happens, SAIL will somewhat alleviate the shortage of ore due to the lapse of mining leases in April.
"It is an important step towards ensuring raw material security for steel PSUs. This will also ensure price stabilisation of raw materials and will have a positive effect on the secondary steel industry," says Dharmendra Pradhan, Union Minister for Steel, Oil and Gas. "We are committed to ensuring raw material security for the Indian steel industry."
At the same time, the government in Odisha, which produces more than 50 per cent of the country's iron ore, has allowed merchant miners to stock ore for up to two years at their storage depots and stockyards instead of the earlier limit of six months. This is expected to lead to a significant jump in ore production in the state in the next few months as both miners and steelmakers stock up in anticipation of the supply slowdown from April 2020. Of the 24 iron ore licences that are lapsing, 16 are in Odisha; these mines produced nearly 50 million tonnes ore in 2018/19.
Still, experts believe, all these steps put together would only delay the disruption or soften the blow.
Too Little, Too Late
"The amendments may reduce the intensity of the disruption but not prevent it entirely," says Rohit Sadaka, Director, India Ratings and Research. "The amendment in the Act basically only helps NMDC in the case of Donimalai and enables resumption of seven million tonne capacity at the mine in a month or two. That is a positive step to that limited extent. SAIL has been allowed to sell 25 per cent of its production but that is subject to whether it is able to produce in excess of what it needs. Further, SAIL has been allowed to sell unutilised ore fines stock at mines. It will not help much because that is largely low grade and India still does not have enough beneficiation or pelletisation facility to make full use of that to meet iron ore lump demand. So there would be few takers for that."
Odisha has also swung into action on the auction process, inviting tenders for 25 iron ore mines in the state in three tranches in October alone. It could not auction even a single mine in 2018/19 due to legal issues. This urgency underlines that the realisation of widespread disruption has dawned upon both central and state governments. Whether this will be enough is still debatable.
"The auction process has been initiated. The key challenge will be whether the new owner is able to get the clearances quickly enough. If there is any kind of leeway through further amendments, which either expedite the process of getting these clearances (environment and forest) or give them a kind of moratorium that they can start mining while the clearances are being sought, (it will help)," says Sadaka of India Ratings. "Or, in case of operational mines where the older miner has clearances, if the new miner can get a deemed approval for the capacity being produced by the older miner, that can get the mine operational quickly and genuinely mitigate some of the pain."
What is certain is that beyond the upheaval next year, the auction route will fundamentally change the way the steel and mining sector operates, impacting prices and profitability in the long term. A July 2019 report by research and ratings firm Crisil predicts three possible scenarios under the auction regime where the most unlikely but optimistic case is leases being extended for existing miners for two-three years, leading to no supply disruption and a 5 per cent reduction in ore prices for steel makers. The base case scenario of timely auctions predicts a 15-20 per cent increase in iron ore prices for steelmakers. And a pessimistic scenario of delayed auctions, high disruption results in an over 30 per cent increase in iron ore prices in fiscal 2021 over fiscal 2020.
Captive steelmakers like SAIL and Tata Steel, with their own iron ore mines, will remain at an advantage over the others.
Beyond the disruption and price increases, will the auctions achieve their other target of attracting fresh investment? Unlikely, say experts. Mining, being a state subject, is vulnerable to the vagaries of changes in governments, which brings in uncertainty in policy framework. The promise of fair auctions is not enough to negate that.
"Any investor wants certainty and consistency in policy framework and that is what the mining industry in India lacks. The process of getting statutory approvals like environment and forest clearances takes a lot of time, and on top of that, political instability in states, like the one we saw in Karnataka (Donimalai), can also affect the sector," says Jagasheth of Care Ratings. "It does not inspire confidence. At the same time, given the global economic slowdown, the appetite for investment with global companies in mining is also quite low right now."