BMI View: Infrastructure deficits in India will continue to constrict growth in the mining sector while posing constraints to mineral imports over the coming years. Despite considerable efforts by the government to fuel infrastructure developments, a gauntlet of heavy bureaucracy and regulatory hurdles will impede the country's ability to increase mining production. Although an increasing number of Indian companies are set to secure mining assets abroad, this will not be an easy undertaking as many of these countries also suffer from a series of issues apart from logistics shortfall.
We believe infrastructure bottlenecks in India will continue to curtail mining production while posing constraints to the mineral imports over the coming years. Indeed, the importance of road, rail and marine facilities in transporting bulk commodities such coal and iron cannot be understated. Although considerable efforts have been taken by the government to fuel infrastructure developments, we remain sceptical as to whether many of the proposed changes will come to fruition. M any of the trophy projects involving experimental public-private partnerships (PPPs) are not making money and face erratic rules. In our view, a gauntlet of heavy bureaucracy and regulatory hurdles will continue to hobble the country's ability to increase mining production .
|Poor Business Climate Taking Toll On Projects|
|India Outstanding Infrastructure Projects (INR1.5bn & Above) By Sector, April 2012|
Although the Indian government is making some attempts to resolve the regulatory hurdles in the various infrastructure sub-sectors, we do not expect these to be fully successful . The ruling government, the United Progressive Alliance (UPA) coalition, has been politically weakened by the withdrawal of the All-India Trinamool Congress (TMC), the ruling coalition's second largest party. Without the TMC's support, the ruling party is now reliant on the fickle support of smaller regional parties for policy execution. Although these parties are currently in support of the UPA government, this has the potential to change dramatically as they have a less pro-market stance.
|Struggling To Edge HIgher|
|India Ports Harbours and Waterways Infrastructure Industry Forecasts|
We have seen previous regulatory reforms in the port sector stalled due to opposition from various interest groups. A key example is the planned move to reduce cabotage regulations at the transshi pment container at Vallarpadam, which has yet to be implemented due to strong opposition from Indian shipping companies. India is aiming to invest US$60bn in its ports sector by 2020 as part of Prime Minister Singh's wider US$1trn investment in the country's choked transport and power networks. At present, the Indian government had set a target to award 42 port projects worth INR145bn in FY2012/13, but has only awarded 22 projects thus far. Our infrastructure desk forecasts real growth for India's port sector to average 7.2% per annum between FY2012/13 and FY2016/17.
As previously highlighted (See our online service, 'Hopes For Coal Railway Link Low') , we believe Coal India Limited (CIL) 's latest plan to build a US$1.4bn railway link to untap coal potential and support a long-term increase in electricity generation is un inspiring. In a bid to end the country's reliance on thermal coal imports within five years , state-owned miner CIL is looking to construct a 327km (kilometres) network in the states of Odisha, Jharkhand and Chhattisgarh to free up more than 330mnt (million tonnes) of coal per annum. We believe issues surrounding frail infrastructure and the lack of high-end technology for underground mining will continue to hinder development in the country's coal sector. Additionally, the pervasiveness of environmental and bureaucratic hurdles will sap growth in the industry. The eastern states of Jharkhand, Chattisgarh and Orissa, home to stellar portfolios of coal reserves, have seen large swath e s of forested areas place off limits due to regulations instated by the environment minister in 2009. CIL is currently pushing to have the forestry protections revoked in the name of energy security. The company is keen to access the more than half of Indian coal reserves lying beneath the forested areas.
|Reliance On Imports To Persist|
|India - Coal Imports & Growth|
Although India is home to an abundance of lower grade magnetite ores, exploration work on magnetite resources has been scant with only 0.2% of total resources considered as reserves. Indian iron ore miners are near the top of the global cost curve owing to the incurrence of high rail freight charges. Due to infrastructure constraints, the freight tariff largely negates any of the cost advantages derived from higher-grade ores. Coupled with the 30% export duty on iron ore exports, we see little scope for Indian miners to challenge the dominance of its peers sitting at the bottom of the global cost curve.
|Mining Woes A Drag On Production|
|India - Coal & Iron Ore Production|
As such, we believe the domestic shortfall in production will force India to import greater amounts of coal and iron ore over the coming years. This is despite the fact that coal imports, which cost up to 40% more than Indian coal, could potentially bankru pt the country's power sector. Nonetheless, w e are awar e that the imports of minerals could encounter their fair share of problems as well. C apacity constraints for rail networks and ports , coupled with a host of other factors, will continue to threaten the delivery of imports to their desired destinations. For instance, the Port of Chennai, the largest port on India's east co ast, continues to suffer from the government's ban on the handling of ' dusty ' cargoes such as coal and iron ore. C oal imports from Australia's eastern ports are also relatively un attractive due to the vast distance to Indian coastal ports. On average, the voyage time is approximately 14 days and the shipping cost is around US$102-120/tonne for thermal coal and US$200-235/tonne for coking coal.
|Access To Coal Fraught With Challenges|
|Southern Africa - Map of Coal Deposits|
Underpinned by our expectation that domestic output will be insufficient to cope with the country's burgeoning demand, we expect a swathe of Indian companies to venture abroad in the pursuit of coal mining assets. In this respect, we believe southern Africa is well-placed to benefit from India's increased coal demand due to the rich deposits of untapped coal reserves in the region . However , we note that many of the countries which are of interest to Indian miners also suffer fro m a series of issues apart from logistics shortfall . To highlight, the Mozambique government is under continuous pressure to review its existing deals with miners, sparking uncertainty over the future development of mining projects. Similarly, South Africa does not have any explicit coal policy in place. The Waterburg in Limpopo, South Africa, is afflicted by poor transport infrastructure for moving coal. The region is located 1,050km from the coast and despite its growing prominence , it still does not have a dedicated rail link to the only export terminal, Richards Bay. The Waterburg coalfield is estimated to hold more than 50bnt (billion tonnes) or 40% of South Africa's coal resources, of which about a quarter could be extracted using opencast mining.