Despite stellar margins and an economy with scope for consuming a lot more metals, there are a few dark clouds on the horizon for metal and mining companies. This could disrupt their volumes and pricing power.
Royalty ranks among the highest expenses for miners in India. The Mining and Minerals Development and Regulations Bill proposes that miners other than coal-miners make a payment that matches their royalty outgo. Coal mining companies are required to pay 26 per cent of their pit-head operating profits.
While coal and iron ore miners may have scope to pass-through costs, the same cannot be said for non-ferrous miners who price their wares on a par with international prices. This will take a substantial bite of their margins.
‘Passing the parcel'
The ministries managing the environment, mining, coal, steel and rural development are also playing ‘passing the parcel' with Bills intended to enable investments in the mining and metals segment. Policy paralysis has made it impossible to open new mines. It has also delayed capacity additions in the steel, aluminium and mining space.
The ongoing ban in Karnataka with little sign of quick resolution is another sign of trouble. States have also been slow in granting mining leases which could speed up capacity additions.
Employee costs for sector players, including Coal India, NMDC, MOIL and Hindustan Zinc, have almost doubled since 2007. Coal India had agreed to a 25 per cent increase in wages in January 2012. Even this is reported to have left unions unimpressed. Such hikes could make mining a lot more expensive.
Distribution has been a bottleneck for the likes of Coal India and NMDC which have often been short on rakes to send out the ore they mine to consumers.
Freight rail rates have also been bumped up regularly, adding to the margin strain.
Rising coal prices have made energy generation far more expensive. If domestic coal output is not ramped up, energy bills are only bound to get higher (aided by a weaker rupee). Domestic coal prices could also increase if Coal India prices its output based on gross calorific value method again.