Positive Modi-fication For Mining Sector

BMI View: The election of the pro-business Bharatiya Janata Party (BJP) should pave the way for positive reforms in India's mining sector. However, the surge in Indian mining equities since May 16 should surrender to headwinds in the coming months as positive sentiment is overstretched and domestic miners will continue to face significant operating hurdles over the coming quarters.

We remain constructive towards Indian mining equities on the whole. The pro-business Bharatiya Janata Party (BJP) has pledged to push ahead with a mandate of sweeping economic reforms that will revive investor confidence in the country. We believe efforts to slim down bureaucracy and merge departments should help improve the coordination between ministries and provide a springboard for pending infrastructure projects. Subsequently, this will trickle down to the mining sector as demand for construction-related materials including steel, aluminium and nickel increases. We currently forecast steel production in the country to increase at a healthy clip of 6.5% per annum between 2014 and 2018, but may look to upgrade our forecast over the coming quarters.

Crucially, India's incoming Prime Minister Modi is seeking to boost domestic coal production by breaking up state-owned Coal India Limited (CIL) for foreign investment. The government could undertake international private-sector partnerships in the coal sector, and auction coal blocks through open tenders. CIL, which accounts for 80% of India's coal output, has consistently failed to meet its production targets over the past years. Red tape, protests against land acquisition and the failure to obtain environmental approvals have continued to stifle production in the coal sector. Indeed, energy poverty has long been a major bottleneck for India's economy. With coal dominating the bulk of the country's energy portfolio, developments in the coal sector is key to the long-term economic progress of India.

Standing Tall
India - Select Mining & Metals Production (% chg y-o-y)

Positive Modi-fication For Mining Sector

BMI View: The election of the pro-business Bharatiya Janata Party (BJP) should pave the way for positive reforms in India's mining sector. However, the surge in Indian mining equities since May 16 should surrender to headwinds in the coming months as positive sentiment is overstretched and domestic miners will continue to face significant operating hurdles over the coming quarters.

We remain constructive towards Indian mining equities on the whole. The pro-business Bharatiya Janata Party (BJP) has pledged to push ahead with a mandate of sweeping economic reforms that will revive investor confidence in the country. We believe efforts to slim down bureaucracy and merge departments should help improve the coordination between ministries and provide a springboard for pending infrastructure projects. Subsequently, this will trickle down to the mining sector as demand for construction-related materials including steel, aluminium and nickel increases. We currently forecast steel production in the country to increase at a healthy clip of 6.5% per annum between 2014 and 2018, but may look to upgrade our forecast over the coming quarters.

Standing Tall
India - Select Mining & Metals Production (% chg y-o-y)

Crucially, India's incoming Prime Minister Modi is seeking to boost domestic coal production by breaking up state-owned Coal India Limited (CIL) for foreign investment. The government could undertake international private-sector partnerships in the coal sector, and auction coal blocks through open tenders. CIL, which accounts for 80% of India's coal output, has consistently failed to meet its production targets over the past years. Red tape, protests against land acquisition and the failure to obtain environmental approvals have continued to stifle production in the coal sector. Indeed, energy poverty has long been a major bottleneck for India's economy. With coal dominating the bulk of the country's energy portfolio, developments in the coal sector is key to the long-term economic progress of India.

However, we expect the spectacular run-up in Indian mining equities since May 16 to lose steam over the coming months. Mining equities including CIL, Hindustan Copper and Sesa Sterlite have surged in recent days in response to investors' exuberance over the positive reforms that the new Narendra Modi-led government could bring about ( see 'BJP's Landmark Electoral Win: Our Initial Thoughts', May 19).

Correction Inevitable
Select Equities & Index, Rebased

Positive sentiment towards Indian equities appears overstretched at present. In an illustration of the rapid gains, technical momentum indicators such as the RSI for CIL and Hindustan Copper are currently overbought, with both fast showing signs of exhaustion. Combined with the elevated challenges that Indian miners will continue to grapple with, this reinforces our view that recent gains will not be sustained.

Run-Up Overdone
Share Prices - Coal India Ltd (LHS) & Hindustan Copper, INR (Daily Charts)
see 'Headwinds Remain, Despite Lifting Of Goa's Mining Ban', April 24Vedanta Resources
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