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Lifting of ban on iron ore mining in Goa is a shot in the arm but problems remain

Ore else...
April 22, 2014 remains a red-letter day in the life of swinging Goa. A pall of gloom appeared to lift over the state’s mining quarters when the Supreme Court removed the ban on iron ore mining in the state after an 18-month hiatus, albeit with permission only for limited extraction. After a similar ban was lifted selectively in Karnataka in April 2013, this was really the icing on the cake.

There was a good reason why the touristy bars on Goa’s sea front were overflowing that evening; mining, the state’s second biggest industry after tourism, was being restored to its glory, providing succour to mining companies and all stakeholders.

During the restriction period, Goa’s economy had suffered. “Iron ore exports from the state, which once accounted for more than half of India’s total export of the mineral, had fallen to zero. India, the world’s third-largest exporter, had turned a net importer of the commodity in recent times,’’ RK Sharma, president of the Federation of Indian Mineral Industries (FIMI), told Financial Chronicle.

But despite the Goa order, it is clear that illegal iron ore mining — tied centrally to political parties and their accomplices — is now under court scrutiny. A Supreme Court bench last week put another state on notice. It asked the central government, the Odisha government and the court-appointed central empowered committee (CEC) to formally explain allegations of widespread mining illegalities, sparking fears that Odisha could face a ban similar to Karnataka and Goa.

CEC will give a list of mines involved in these illegalities and an interim order in the matter is expected soon.

Also, despite the earlier euphoria following the court order, some other kinds of troubles could just have begun for the iron ore mining industry. For instance, leases of most mining companies have expired and fresh leases are needed before they start mining.

In Goa, a panel comprising of justices, AK Patnaik, FMI Kalifulla and SS Nijjar, has ordered the cancellation of mining leases that were issued post 2007 in cases where the maximum renewal period of 20 years had been completed. The court also ordered an expert panel to give within six months its final recommendations on the annual excavation cap from Goa mines. The order also said there could not be a deemed lease renewal after 2007, of the existing lease deeds emanating from 1962 onwards. Besides, leases will not be granted for mining within a kilometre of national parks and wildlife sanctuaries. “The court has directed the ministry of environment and forests (MoEF) to identify within six months the eco-sensitive areas around national parks,’’ said FIMI’s Sharma. (See full interview on Page 12)

Experts also point out that mining companies will have to brace up for several hurdles going forward. Lifting of the ban is no automatic guarantee that mining can commence any time soon. Clearance from the MoEF is required along with the state government lifting the ban and this could take some time. For instance, the ban in Karnataka may have been lifted in 2012 but mining is yet to pick up to earlier levels. In addition, general elections are in full swing and by the time the next government takes charge at the centre, the monsoon will begin. Mining does not happen then so the earliest mining that can take place will be post-September, experts said.

As in Karnataka, iron ore miners in Goa are unlikely to resume operations anytime soon, as mine leases have expired for most of them and it may take up to two years to obtain fresh permits. Industry officials said the mining companies would need to apply for new leases and require fresh environmental and forest clearances, all of which takes time. “Most companies, including Vedanta’s Sesa Sterlite, may have to wait for a year or two to resume operations, as their licences expired way back in November 2007, and they will require fresh licences,” said FIMI’s Sharma.

Then there is the question of state governments, which take a lot of time to renew mining leases. FIMI’s Sharma is optimistic that the Goa government would be proactive in issuing permits to speed up resumption of mining. FIMI says state governments, as a rule, do not renew mining leases on time. “A serious concern of the mining industry is what will happen if the leases are not renewed at the expiry of the first renewal. States just sit on them and don’t take any action,” Sharma added.

S Sridhar, executive director of Goa Mineral Ore Exporters’ Association, believes despite the lifting of the ban, activities will not resume before elections conclude. “Only after the new government settles down there could be some uptake in mining. It is difficult to estimate at the moment on how much the state is likely to produce.’’

Hopefully, in the changed scenario, the need to use best practices in mining would come to be recognised. The ban imposed by the Supreme Court on Karnataka and Goa was a result of excess illegal mining in these states, which reached its zenith in 2010-11, apparently without a care in the world for environmental concerns.

The Goa ban was imposed in September 2012 on a petition filed by lawyer activist Prashant Bhushan after a judicial commission, headed by Justice MB Shah, exposed a Rs 35,000-crore scam involving top mining companies, politicians and bureaucrats. Mines in Goa were shut down for 18 months after a government-backed inquiry estimated that illegal trade in iron ore had cost more than $6 billion over five years.

Analysts believe the apex court intervention halted this daylight robbery conducted by many mining companies across the country. In 2011, it banned iron ore mining in Bellary, Chitradurga and Tumkur districts of Karnataka, following a report submitted by the Karnataka Lokayukta, a quasi-judicial body, exposing the activities of businessmen and politicians who were involved neck-deep in illegal mining. After the companies were accused of conniving with government officials to mine ore illegally, the court had asked the court-empowered CEC to monitor mining activities in the area.

The court allowed mining to resume in both Karnataka and Goa after putting a cap of 30 million tonnes per annum (mtpa) of iron ore to be mined in Karnataka and 20 mtpa in Goa. Before the ban, production from Goa was pegged at 45 mtpa.

The companies are naturally elated that things are now moving. Following the ban in Karnataka and Goa, the production of Sesa Sterlite, the largest exporter of iron ore in the country, had come to a grinding halt. It saw a significant dip in revenue and its profits nose-dived. Recently the company has been forced to cut 40 per cent of its workforce.

At its peak in 2010-11, Sesa Sterlite’s iron ore business had reported a turnover of Rs 10,152 crore and profit of Rs 4,222 crore. However, imposition of mining bans, first in Karnataka and later in Goa, had a debilitating effect on the company; it led the firm to report a negative Ebitda of Rs 148 crore in April-December 2013.

Mines in Karnataka have been accorded different grades. Sesa Sterlite’s mines, which came under grade B, are now operational after adhering to the reclamation and rehabilitation (R&R) plan. The company has recently managed to get mining leases in Karnataka. “We plan to produce 2.29 million tonnes (mt) according to the annual environment clearance capacity for our Chitradurga mine. In the iron ore market, some grades and types of ore are liked by domestic buyers and they have bought it from us even when India exported 120 mt of iron ore at its peak. There have been other types of ores for which we have been forced to look at exports. We will continue to urge authorities to abolish export duty on iron ore and the very high railway freight on iron ore meant for exports so that domestic mining industry realises international market price for ores are not liked by domestic buyers,” said AN Joshi, vice president (corporate affairs) for iron ore business, Sesa Sterlite.

Currently domestic buyers buy ores at a price which is 25-40 per cent of its international FOB value. So it is not a case of high demand but of government-enforced subsidised iron ore price for domestic buyers. Domestic mining industry will prosper and grow only with its products priced at international market whether sold in the domestic or international market, explains Joshi.

“With the apex court judgment, there is greater realisation that in the mining industry, systems of clearances either at state or at the central government level have been opaque and without any accountability and we are sure that such judgements — and probable stoppage of even public sector-operated mines — may bring in a system of on line and time-bound clearances. For the mining industry to regain its natural potential, improved processes of clearances and governance, markets where miners earn international market price and thrust on exploration by government, and responsible, safe and mining in line with current environment norms by miners, is essential,” he adds.

N Kothari, chairman and managing director, of state-owned NMDC told Financial Chronicle that resumption of mining in Goa would take at least three to six months as the companies will have to get final clearances. The demand for iron ore is steady at the moment and the company is looking at further expanding and ramping up production in Karnataka and Chhattisgarh.

The ban did not merely hit mining companies, it also took a toll on state government revenues. For instance, mining and exports of iron ore contribute around 25 per cent of Goa’s revenues and therefore, the state took the brunt of the ban.

Points out FIMI’s Sharma: “The ban in Goa and Karnataka contributed to the slowdown in the economy and all stakeholders involved suffered. Over 100,000 jobs were lost with related assets like, trucks, dumpers and barges lying idle. There are over 18,000 vehicles that have lost business.”

The situation in Karnataka is marginally better, the state having got their permission to start mining over a year ago. However, only 22 out of the state’s 115 mines that have been allowed by the Supreme Court to recommence mining have resumed production. The 21 operational mines are able to produce 10.7 mpta, while NMDC is producing around 8.5 mpta, taking the total quantum of iron ore mined in the state to around 19 mpta, while creating a shortfall of 11 mpta, according to a senior official of the CEC.

In Karnataka, grade A mines with all essential clearances, adhering to the norms of mining, were allowed to start operations. After a few months, grade B mines were also granted similar permission after they complied with R&R norms and paid penalties imposed by the Supreme Court. The mining leases of grade C mines have been cancelled and will later be auctioned.

The apex court has allowed mining of up to 30 mt for domestic consumption, of which 25 mt is allowed in Bellary and five in Chitradurga and Tumkur region. “Most mines are facing delay in resuming operations in Karnataka for want of statutory clearance; plus the R&R plan needs to be executed,” the CEC official said.

According to him, the plan was to give clearances to the remaining mines as well, but to execute it fully would take at least a year. The court had recently permitted Sesa Sterlite to resume iron ore mining at Chitradurg in Karnataka, but capped production from the mine at about 40 per cent of its annual capacity.

In such circumstances, production in the mining sector declined significantly in the last couple of years. In 2010-11, the country, which produced around 226 mt of iron ore, came crashing down to a paltry 92 mt in 2013-14, as production in Goa had come to a halt. Karnataka produced only 19 mt, while Odhisa dished out 72 mt, said Prakash Dhuvvuri of Ore team.com.

However, experts fear that while in the near term, illegal mining may not be possible by the mining companies as it is being monitored by Supreme Court-appointed committees, in the long-run it is possible that companies may flout the rules again, the stakes being so high and returns to favourable.

Santosh Hegde, former Supreme Court judge, who was the Lokayukta while investigations into illegal mining were in full swing in Karnataka, said, “It is possible that mining companies may again try to do illegal mining but there should be strict monitoring. These companies have caused so much damage to the environment and if illegal mining continues, iron ore, which is a natural resource, will get exhausted in the next 50 years and we will have to import it from other countries. I am not against mining but illegal mining, which is causing severe damage to the environment, should not be allowed. All our rules are stringent but the only problem is authorities who are supposed to keep a check are colluding with the miners.” As someone who saw the problem from close quarters, he should know. (See full interview on Page 11)

In Odisha for example, leases continue under the deemed clause for 20-30 years and they are likely to see a similar ban as Supreme Court may not permit mines to continue mining with deemed licenses, said Duvvuri of Ore Team. Even the captive mines of Steel Authority of India (SAIL) and the Tatas come under this category in Odisha.

There is another aspect. Industry watchers say the resumption of mining may not benefit domestic steel companies, as the miners would prefer to export their produce, also because the domestic demand for steel is at low ebb. Sanjay Jain, an analyst at Mumbai brokerage Motilal Oswal, said, “It will take a lot of time for the miners to resume operations. Further, steel firms will not benefit much from the lifting of the ban in Goa, as most iron ore is exported.”

According to Jain, domestic demand for iron ore has been on the lower side, as steel demand has dropped sharply due to the economic slowdown. That apart, most Indian steel companies, except JSW Steel, prefer high-grade iron ore. So, the domestic mills are unlikely to benefit much from the Goan ore, which is low to medium-grade.

Now even JSW is unlikely to use Goan ore for its major steel plant at Vijayanagar in Karnataka’s Bellary district. It might, though, consider using the Goan produce for its steel plant at Dolvi near Mumbai. So for the miners, exports remain the best choice. The Goan ore is more suitable for exports, as China has the technology to make use of low-grade ore. In India, except JSW, which can make use of low-grade ore, there is no market for Goan ore. It cannot be brought to Karnataka due to tough terrain of Western Ghats, neither can it be loaded on to the rail wagons, Jain added.

India exported 12.57 mt from April 2013 to February 2014, against 17.35 mt in the year-ago period, according to FIMI data. Before the mining ban, the country exported more than 100 mt a year, mainly to China.

Neither is the timing of India’s entry into the iron ore export market likely to find favour with mining companies. The days of super profits are gone. China is India’s largest buyer of low-grade iron ore and their steel industry and ore traders blend this well with high-grade ore (62 per cent iron content) from mines in Australia and Brazil.

But China has been discouraging large number of small-scale blast furnaces that use low-grade iron content ore (30 per cent or below, iron content) in favour of furnaces that use high-grade iron ore that are less polluting but have higher overheads. In fact, in order to lessen the dependency on imports, China has stepped up its domestic production of iron ore and reached 1.4 billion tonnes last year, said Ashish Upadhyay, director with India Ratings & Research. (See guest column on Page 13)

Australia, the world’s largest miner and exporter of iron ore with a production of over 270 mt last year, has been facing an excess supply of iron ore by around 35 mt. This has caused the prices to fall given that the demand in China has also come down, Upadhyay added.

At a time like this, India’s re-entry into the global supply chain will only add to further pressure on prevailing low prices and that’s not good news for Indian miners like Sesa Sterlite. From its heyday in 2010, when India exported 117 mt of iron ore and was the third largest exporter globally, the levels have plummeted to around 17 mt in 2013.

For the Indian economy, it’s critical that mining operations resume as it will have a cascading positive effect on all stakeholders. In the meanwhile, Indian miners will have to ride the depressed market situation until the Chinese economy picks up again. However, experts are sceptical if China will return any time soon to its 9 per cent growth rate. It remains to be seen how India plans ahead.

One thing is clear though: It is the unlimited greed of mining companies that resulted in their suffering. If this tendency is not scotched, and if the companies don’t mend their ways, it is possible that they might witness similar restrictions – possibly again from the courts. It is also possible that once full-fledged mining resumes, companies may again try to flout norms and exceed their mining limits. Hopefully, they have learnt their lessons the hard way. If not, imports and not exports will become the norm.

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