Mining lease expiry in 2020 throws up risks and opportunities

The Indian mining industry is staring at a major churn as leases for merchant mines expire after a gap of 50 years in 2020.

The move will impact a total of 334 mines. Of these, 48 working mine leases contribute significantly to the production of iron, chromite and manganese ores.

Most of the working mines whose lease will expire are in Odisha (24), Jharkhand (6) and Karnataka (6). Many non-operative mines are in Goa (184), which has a blanket ban on mining.

The merchant mining leases for the ones with 50-70 mtpa (million tonnes per annum) production accounting for 25-35 percent of the total iron ore output are set to expire in March 2020, which will put pressure on non-integrated steel plants.

The demand curve for iron ore

A good 60-70 percent of steel producers in India have no captive mines and are dependent on merchant miners for minerals. Considering the capacity that will go off the grid in light of the lease expiry and bidding, significant price pressure is building up for the Indian steel industry, where export competitiveness remains low due to a host of factors, including logistical bottlenecks and pricey raw material. If the price of inputs shoots up temporarily, it could open the door to higher imports of steel products.

The onus is on the government to run the process transparently and efficiently. India’s total iron ore mining output for FY19 stood at 220 mt and the demand is expected to go up by 5-8 percent in FY20.

Govt’s stand on mine closure

The government is set to auction the mines in January-March 2020 and is also planning to bunch up clearances and award of the leases to minimize disruption in the production. The auction winners may just get to stick on with the approved mining plan and environmental clearance of the previous mine operators for two years till a new company secures clearances. This will help avert a disruption in mining operations during the transition.

If new operators are not able to bring mine production to full throttle in a short duration, an increase in imports of iron ore cannot be avoided, potentially worsening the current account deficit.

Bidding to decide the fate of the mining sector

Even after 2020, the total capacity of operative merchant mines will be 100 mtpa, supplemented by public companies with a capacity of 80 mtpa. Over and above merchant leases, captive mines in Odisha, Jharkhand, Karnataka and Chhattisgarh will run a capacity of 99 mtpa, which puts the total available iron ore capacity at nearly 200 mtpa even after older merchant mines face underbidding. To push output, some of the virgin iron ore blocks that were won through competitive auctions are expected to start mining operations after 2020.

The global mining industry is plagued by declining mining productivity over the past couple of decades. Merchant mines changing hands after 50 years will create fresh opportunities for miners to bring in global best practices, benchmark costs and become cost-competitive to remain relevant in the new world order.

Authored by (at the time of writing): 

Kaushal Patel, Member, Industrial Goods and Services Practice 

This post first appeared on money control and has been published with permission. Read the original here.

Do you want to turbocharge your business using digital technologies and processes? Write to us below.