Mining Equipment Trends
Mining equipment demand is likely to revive in the short to medium term. Pavethra Ponniah elaborates more on the trends.

The mining equipment industry (MEI) is heavily dependent on equipment demand from coal and iron ore mining, both being highly equipment intensive, with over 30 per cent. The MEI has been witnessing muted demand so far due to the recent trends in the main user sector. Market sources - OEMs, dealers and contractors - indicate that the demand from the coal mining segment for new equipment was subdued in CY2016 due to high coal inventory and low off-take from state electricity boards (SEBs). However, there have been a lot of tenders by Coal India Ltd (CIL) and its subsidiaries for over-burden removal in the current year (CY2017), which is expected to revive demand in late CY2017. New equipment demand from Singareni Collieries Company Ltd (SCCL) is expected during Q1CY2018. Some demand for mining equipment can be generated by the private mine developers and operators; however, quantum of the same is likely to be moderate. On the other hand, iron ore mining, which is largely focused in Odisha, Karnataka and Goa has been largely subdued in CY2016 and YTD July 2017.

Coal output
On closer analysis of the coal sector, it has been noticed that over the past five years, CIL, the primary producer has been reporting consistent growth in coal production, while SCCL's coal production has been growing at a healthy rate over the last three fiscals.

However, the situation turned around and the growth rate decelerated in FY2017, whereby the production of these two entities, which contributes to more than 80 per cent of India's total coal production, reported 2.7 per cent growth in FY2017 against 9.6 per cent during FY2016. The deceleration was on account of weak energy demand growth, leading to declining PLFs for thermal power plants, which in turn led to a build-up of coal inventory at CIL pitheads as well as at the power plants.

The situation in Q1FY2018 was no better and coal output declined by 4.7 per cent year-on-year (Y-o-Y). However, subsequent to that coal production in the country improved by 7.7 per cent Y-o-Y in July and August 2017 (during the first two months of Q2FY2018). This improvement can be attributed to increase in demand from thermal power plants supported by electricity demand growth in the country. Further, lower supply from hydel and nuclear power stations resulted in higher demand for thermal power, which is reflected in increased thermal PLF of 58 per cent in August 2017, against 54.4 per cent in July 2017. Higher demand from thermal power sector, coupled with clearing of pithead inventory of coal over the last few months translated into ~15 per cent coal production growth in the month of August 2017.

Further, CIL has planned a capex of Rs 150 billion in FY2018, out of which ~Rs 85 billion (~57 per cent) will be towards core operations, i.e. expanding and upgrading mines. The remaining non-core capex of ~Rs 65 billion will be towards setting up of power plants, equity contribution towards fertiliser units, and liquid hydrocarbon manufacturing facility. The trickle down effect of this is likely to boost mining equipment demand.

On the flip side, given the faster pace of coal supply growth as compared to the limited demand off take, new auctions of coal mines have been put on hold. After annulment of the fourth round of coal block auction in December 2015, the government has also infinitely deferred the fifth round of auction, which was to be held in July 2017, due to poor response from bidders as well as lower than expected bid amounts. As of March 2017, the government has auctioned 31 blocks in the first three phases for specified end-use and allotted 51 mines to state-owned entities.

These developments may negate incremental demand growth for the MEI to some extent.

Iron ore mining
As for the iron sector, domestic iron ore production is estimated to have grown by ~22 per cent during FY2017, driven by reopening of mines in Odisha, Jharkhand and Karnataka during FY2016. Odisha continues to contribute to more than half of the production in the country, followed by 15-17 per cent share by South Karnataka and Chhattisgarh. Iron ore mining also being an equipment-intensive process, has pushed up utilisation for larger equipment like excavators, dozers and dumpers.

Though iron ore production has grown at a healthy rate during FY2017, demand from the domestic steel industry remained subdued in FY2017. Domestic iron ore prices witnessed some improvement starting from October 2016 due to firming up of international prices. However, gradual decline in international prices from February 2017, coupled with weak demand prospects from domestic steel industry compelled NMDC to reduce prices in July 2017.

However, improved demand in Chinese steel market driven by private and public investment in infrastructure has translated into healthy global steel capacity utilisation rates during 8MCY2017. Though domestic demand remains moderate, steel production growth in India is expected to remain healthy during H2FY2018 on the back of increased steel prices globally, due to demand from China. International iron ore prices have witnessed a rally from July 2017 onwards. Resultantly, domestic iron ore prices in Odisha have firmed up in August 2017 on account of better export prospects.

Domestic iron ore production also reported growth of ~5 per cent in Q1FY2018, after a strong growth of above 20 per cent during the previous two fiscals. These developments are expected to have a positive impact on the MEI going forward.

Status of new iron ore mine auctions

State Comments
Odisha The state has auctioned three mines won by Essar Steel (in March2016), Bhushan Steel (May 2017) and Bhushan Power (May 2017).Five more mines to be auctioned by December 2017. 16 mineleases are expiring in 2020 so re-auction would be needed.
Karnataka Seven out of 15 mines were auctioned in October 2016 and five were won by JSW Steel while remaining two by MSPL.
Goa All existing mine leases were extended till 2027 beforepromulgation of the MMDR ordinance.
                                         Source: Ministry of Mines, ICRA research
The author is Vice President and Sector Head, Corporate Ratings, ICRA.