Indian metals and mining sector continues to rely on steel production

Despite steady GDP growth, India’s minerals & metals sector continues to struggle with infrastructural inadequacy, barriers to land acquisition and unfavourable environmental factors, according to a new report from global professional services firm EY.

The overall outlook for the minerals & metals sector in India is promising, given that the core of the industry – base metals and steel – are expected to witness strong growth over the next few years. This is primarily driven by a global expansion in demand for these commodities, particularly from the largest consumer –China.

On the other hand, the sector is also subject to a number of risks as the demand for minerals such as coal is registering a steady decline. In addition to a number of regulatory and environmental factors, this decline is primarily a result of an increase in the demand for renewable and cleaner forms of energy.

According to a new report form EY, the sector is also facing a number of challenges specific to the Indian market. These include issues with governance in the sector, the current prevalence of a mining ban, a poor financial situation for a number of firms in the sector, and an overall lack of investment. 

Nevertheless, the positive scenario in the sector across the globe is expected to carry the Indian market through this rough patch. Following a series of dips between 2014 and 2016, the prices of commodities worldwide have registered steady increases over the last two years.

The firm enumerates a number of factors that might be responsible for this jump, which include an overall shortage in supply of these commodities across the world, keeping the prices steadily high. The uncertain trade environment in the current political climate is another cause for prices remaining steadily high.

Perhaps the backbone of India’s mineral & metals sector is its steel production, which is one of the primary drivers of growth in the industry, also due to global factors. China is the largest consumer of steel in the world, and was responsible for a large portion of the 2.8% growth registered by the global steel industry last year. 

In India, steel production increased by an impressive 6.2% , taking overall production levels to 101 megatonnes (mt). The steel sector also has a promising future, given the ambitious goal laid down under the National Steel Policy 2017 to reach a production value of 255 mt by 2030-31.

Such a target would require an average growth of 7.4% each year, which would be challenging to achieve in light of slow growth in consumption rates. According to the report the slow growth in consumption of around 5.2% is primarily a result of policies such as demonetisation and the implementation of the GST, despite the fact that the economy appears to have recovered from those setbacks.

The story for coal is radically different, as India appears to be lagging behind to some extent in terms shifting away from the high carbon footprint energy source. Demand for seaborne thermal coal in India grew by 5% over the last year, while it declined by 0.4% in the US and as much as 8% in the EU.

Further, this demand for coal is only expected to grow over the next few years. As explained in the report, “Commercial energy consumption in India has grown by ~700% in the last four decades. A growing population, expanding economy and urbanisation will continue to drive up energy usage with coal being the dominant source in the fuel mix.”