A New Lease on Life

Major reforms in government policy and mechanisation of Indian mines bode well for mining equipment OEMs, because last few years the mining sector was posting negative growth. Both these factors will give a new lease on life for equipment manufacturers, who were harshly impacted by a prolonged recession in the sector.

Early last year the government promulgated the Mines and Minerals (Development and Regulation) Amendment Ordinance, (MMDR), to bring about landmark reforms in India’s mining sector. The most important reform therein -- of open and transparent bidding for mining lease and concessions -- has opened up the sector, unleashing the latent potential of a sector mired in scams and sluggish growth till recently. Along with regularizing mining auction the Act also encourages modernization of Indian mines. Also India’s mineral and metal endowments are largely unmapped and unexplored, only about 13 percent of 575,000 square kilometers with geological potential in India has been explored in detail so far, with minimal private-sector involvement, according to the Federation of Indian Mineral Industries. The new mining ordinance will encourage further exploration activities to tap this largely untapped potential. While the Regulatory enablers are now in place, enablers on the demand side are also in place. Fuelled largely by the ‘Make in India’ campaign, growth of India’s manufacturing sector will turn demand for industrial commodities robust. And demand for coal from the power sector will fuel coal mining to fill the gap currently met by imported coal. The government has targeted an investment of a trillion rupees ($15 billion) over five years to double mining output and cut mineral imports. All these factors, of vast untapped reserves, the new MMDR, and mechanization of India’s mines, add up to a substantial market for mining equipment of all sorts. However, plenty of hurdles remain on the demand side for OEM suppliers, many of which can be removed by policy reforms.


Market equations

Although India’s mining sector has finally opened up and projects are being rolled out on a fast track, most small and medium sized miners are cash strapped and have little or no money to buy costly mining equipment. The big companies, like Coal India, MMDC, SAIL, etc, and other private sector players like Vedanata have the financial muscle to buy equipment. But the other two buyer segments, which are large in terms of volume and value and form the bottom of the pyramid, will either have to resort to equipment finance or lease or rent equipment for operating their mining leases or concessions. Under these circumstances there will likely be an increase in rentals and long term leasing of mining equipment. Therefore, in order to remain competitive most manufacturers of mining equipment will also offer lease/rentals options on their macines and will tie up with banks and NBFCs to arrange euipment finance for prospectove clients. Hopefully, once the new GST becomes operational it will allow easy interstate transfer of mining equipment rentals and leases.

According to a report by ICRA, demand for mining equipment had witnessed limited support end of 2015 due to a mounting coal stockpile in the country against the backdrop of subdued power demand/poor transmission capability and a weak outlook for steel, which impacts iron ore mining. Considering the global outlook for steel prices, revival in such projects in the near term is unlikely. ICRA expects resolution of problems hindering several mines in the country to eventually support a recovery for the industry in CY2017. Moreover, private investment activity is unlikely to grow in the near term, given the constraints of moderate capacity utilisation, high indebtedness of corporate balance sheets and several sector-specific problems in power, steel and other segments. On the positive side the impact of reforms in the mining sector will eventually bring in the private sector, even as sector-specific problems are resolved in the long run, providing a modest fillip to mining and construction equipment (MCE) demand. However, this recovery is likely to be slower than the uptick during calendar years 2010 and 2011.

The MCE industry’s performance in FY2015 was sluggish in most months. While most players reported stagnation or a slight decline in revenues, two players (primarily in the excavator segment) improved their market share, thereby achieving thin revenue growth. The same along with reduction in losses by other players translated into a modest improvement in industry profitability. The industry credit metrics remained under pressure, although slightly better than in the previous year. The focus of industry participants on reducing inventory levels was visible in FY2015. In ICRA’s view, demand for the MCE industry will be driven by roads and railways in the near term. However improvement in industry financials is expected to remain moderate over the next 12 months as demand from key user industries is expected to remain flat.
Despite several pressures on the demand side, especially equipment financing issues, opening up of India’s mining sector will fuel demand for new equipment substantially on the back of major expansion of mining activity across the country, especially for coal and iron ore mining.

Global trends

Mining equipment sales across the globe are still falling, according to the VDMA Mining Association, an affiliate of the German Engineering Federation (VDMA, Verband Deutscher Maschinen- und Anlagenbau). However, it is optimistic that 2017 will bring a return to profitable equipment sales in Germany, which is a major source for mining equipment globally.

On a global scale, analysts from the Association expect things to improve in 2017. Data provided by the VDMA Mining Assn. shows that the rate at which mining equipment sales are dropping is slowing. In 2014, worldwide exports of mining machinery were $30.3 billion (€27.9 billion), down 10.2% from 2013. Germany in 2015 saw a drop of only 3% in machinery production which reflects a much lower annual drop in sales compared to the 29% drop from 2013 to 2014.

Globally, the mining sector can remain cautiously optimistic about the future, as an increase in customer inquiries is being reported by the VDMA Mining Assn., which indicates customers are starting to look at buying new equipment. The association also expects that demand for metallic and raw mineral materials extracted in hard-rock mining will increase substantially as global production of alternative energies continues to expand. Another reason for this cautious optimism, is in the need for raw material producers to reduce costs. In order to achieve profits in the current low-price environment, they have to increase the efficiency of their machinery and plant, and thereby reduce their costs.

According to another Consultancy, Off-Highway Research, there have been several instances of positive predictions for the growth of the global market in upcoming year. A few silver-lining equipment markets have had drudgingly slow progress, but progress nonetheless. According to the Consultancy, it’s been a long time since the health of mining industries were strong enough to give equipment manufacturers long-term confidence, but that could be changing as several key growth markets continue their progress while others finally stabilize. “There can be no doubt that 2015 was a tough year for the global equipment industry, due to slowing world economic growth and weak commodity prices,” says David Phillips, Managing Director, Off-Highway Research. “Unit sales fell to their lowest since the crisis years, and the drop in the Chinese market was particularly brutal. However, there were improvements in several developed countries which helped offset some of these losses,” he adds.