Analysis: Staring at an increasing resource crunch

In a country where minerals are reported as scarce, comprehensively mapping and identifying available natural minerals will result in a major upward revision of our estimates how much can be mined indirectly curbing illegal mining. Puneet Goel writes.

History says that India should be rich in mineral resources, given that Indian sub continent has evolved from erstwhile Gondwanaland comp­rising Africa, Australia and South America, all of which are endowed with large amount of mineral natural res­ources. How­ever, a large number of mineral re­so­urces that are deficient or scarce in India are found in abun­ance in the erstwhile conti­nents of Gondwanaland Africa, Australia and South America

As the following table shows, the country is deficient in respect of a number of key mineral resources:One reason for the lack of mineral resources is that a large part of the country still remains unexplored:
•Regional exploration (Geo-physical and Geo-che­mical) as a percentage of total hard rock has been completed in only 4.2 percent of the total hard rock area of 1.82 million sq km.
•Regional exploration (Geo-physical and Geo-chemi­cal) as a percentage of Obvious Geological Potential (OGP) has been completed in about 13.2 percent of the total area of 570,000 sq km.
•Geological mapping on a scale of 1:50,000 is largely completed; however thematic geo-physical and geo-chemical mapping is yet to be done.

Even where the country is expected to enjoy relative abundance in mineral resources such as thermal coal, iron-ore, natural gas etc, recent developments have ensu­red that development of these mineral resources are con­siderably lagging behind as compared to the development of end-use project/demand for these resources; which is going to have a significant impact on the country's GDP growth in the long run.

Resource Crunch
The country is facing significant shortages/supply side issues in case of thermal coal, natural gas, iron ore, and limestone (steel grade).
Coal: It is estimated (as the chart below shows) that by 2016, the country would be facing a deficit in domestic supply of coal of at least 226 million tonne. This would have several implications:
•Significant capacities in power sector would be stra­nded and the capacity located in deep hinterland would be the worst affected, as it wo­uld become an extremely difficult proposition in logi­stical and cost terms to serve this capacity by imported coal.
•Global prices of imported coal would continue to remain high or see a further rise, as this would mean an import of nearly 150 million tonne of coal in 2016 as against thermal coal imports of about 65-70 million tonne in FY 2011. Given that global Pacific market (of which India is a part) thermal coal phy­sical trade is only about 400 million tonne; an addi­tional requirement of 80-90 million tonne from India and similar or a higher requirement from China will put significant pressure on the available supplies. Further, it would be practically impossible to subs­titute such a large deficit by imported coal.
•The variable cost of power generation would increase by nearly three times if imported coal is substituted against domestic linkage coal. Given the precarious financial position of distribution utilities in the cou­ntry; the substantial increase in cost of power would further increase the losses and the likelihood of def­a­ult by utilities would increase. Also, their ability and willingness to purchase higher cost power is com­ing down substantially which means they would pre­fer to shed load rather than purchase higher cost power.

Natural Gas: It is estimated that nearly 8,000 MW of new gas-based capacity may be stranded due to lack of fuel as the domestic gas output declines. Most of this capacity is expected to be commissioned in the next 12-month period. The 10 projects, aggregating to 8,000 MW would require gas of 28 MMSCMD.The projects were being developed on the premise that Re­liance gas production from KG basin would increase from 60 to 80 MMSCMD. However, the production from the block has instead declined to less than 45 MMSCMD. This basically means that the additional capacity may not get any domestic gas and will need to rely on LNG. This will have following implications:
• The capacity will become stranded. Given the curr­ent LNG prices at $14-15 per MMBTU, which translates into more than $18 per MMBTU on a delivered basis leading to a variable cost of about Rs 7 per unit vs about Rs 2.5 per unit with do­mestic gas. The distribution utilities will not be able to aff­ord this power and these capa­cities will not get dis­patched or partial dis­patch would happen only dur­ing peak hours.
• Further, the necessary LNG infrastructure and back-end supply arrangements required for supp­lying the gas to these power stations is also not in place. Any new infrastructure creation for meeting the sector's requirements will not take less than 2-3 years.
•This will potentially put an investment of Rs 25-30,000 crore at risk and there would be significant risks of defaults in the short to medium term for the banking sector from these power plants.

Other implications: In the case of iron ore, the ban in mining in Karnataka in response to illegal mining has st­a­­rted affecting end-use projects and JSW Steel has al­ready cut down its steel production at its Vijayanagar pla­nt in Bellary district from a capacity of 10 million tonne by a third due to shortage of iron ore supply to its plants.

In limestone, we see an increasing trend of limestone required for steel purposes being imported from Gulf and other supply sources.Even new limestone mines for gre­enfield cement manufacture are also becoming difficult to find in cement deficit areas such as the east.

Overall, the resource crunch and specifically the sho­rtage in energy resources of coal and natural gas will sig­nificantly impact the country not only in terms of its direct impact on GDP growth rate, but also creating an upward impact on the global prices of these commodities and ultimately making the cost of supply of end products such as power much more costlier than seen currently.