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Global market crash causes worry in Indian mining sector

25th August 2015

By: Ajoy K Das

Creamer Media Correspondent

  

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KOLKATA (miningweekly.com) – The market crash, with China at the epicentre, has cast a pall over India’s mining and mineral sector reforms and its ability to attract foreign investments to right the commodity sector.

With international commodity markets rocked and prices in a tailspin, serious concerns have surfaced over India’s attempt to fix the mining and mineral sectors, led by private investments.

The immediate impact of Black Monday would be seen in the country’s attempt to start the allocation of mineral resources to miners and end-users through the maiden auction route and in the extent to which iron-ore operations in key mineral-rich provinces were resumed.

Few were betting on new money, either domestic or foreign, flowing into new projects or even to expand existing capacities.

“This commodity bear market was written large on the wall since 2008. I don’t see any hope for commodities given China's slowdown and the strong US dollar,” First Global India VP and joint MD Shankar Sharma said.

According to a researcher with an Indian financial institution, Chinese depreciation of the yuan would trigger further deprecation in emerging market currencies and particularly countries that have high commodity exports or those with high trade deficits with China.

India has a trade deficit of $50-billion with China, while trade with China comprised 10% of India’s total merchandise trade, he pointed out.

And with the government of the western Indian province of Goa planning to resume iron-ore mining operations after a three-year Supreme Court-imposed ban, few have a clue of the road ahead.

“In the present global environment, my understanding is that taking out ore from underground means losing money. There may be production, but where are the buyers?” asked an official with the Goa Mineral Ore Exporters’ Association.

“Some 16-million tonnes of iron-ore fines were idling at stockyards from a lack of buyers. So where will buyers come from for the additional 30-million tonnes a year of iron-ore that is assumed to get back into production in Goa,” he said.

The Indian federal government has prodded the provincial government to get the auction of 82 mineral blocks, containing iron-ore, bauxite, limestone and dolomite, under way by mid-October, but few would hazard a guess on the response to this auction at a time when global commodity prices were in a tailspin.

“As a government majority-owned steel producer, we may have the mandate to maintain minimum capital investments to sustain the macro-investment climate, but a downturn is also a time to maintain cash and stay away from investment,” said a senior official with Steel Authority of India Limited, pointing out that the domestic steel industry was already reeling under bank debt of an estimated $50-billion.

“At a time when margins from finished products are diminished in the face of cheap Chinese steel imports, cash would have to be conserved on the balance sheet rather than increase capacity or invest in raw materials,” he added.

The impact of currency market turmoil on India’s estimated 200-million tonnes of coal imports has become uncertain.

“International coal prices might be at their lowest but the Indian rupee too plunged 1.3% on Monday to a two-year low of Rs66.65 a dollar and already cash-strapped thermal power producers were unlikely to commit to import transactions,” a former Coal India Limited (CIL) CEO said.

“The moot questions is whether CIL, a primary domestic supplier of the fuel, can step in to bridge the shortfall in imported coal,” he added.

In 2014/15, India imported $116.44-billion of crude oil, $17.69-billion of coal, $6.59-billion of minerals and ores and $6.33-billion of fertilisers.

Ordinarily, a net commodity importing country could benefit from building infrastructure, but domestic commodity producers would be impacted in a net basis from lower commodity prices, a researcher with a ratings agency said.

Simultaneously, commodity-based projects would find it difficult to raise project finance, as a rise in interest rates would result in money leaving the country, he said.

Foreign investor interest in project financing would get dampened with the US Federal Reserve hiking interest rates and investors shifting to the bonds market, thereby negatively impacting investor interest in commodity investments in India, he added.

Edited by Esmarie Iannucci
Creamer Media Senior Deputy Editor: Australasia

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