Companies & Sectors
It's Odisha's turn for iron ore mining ban!

There is the fear that a total ban on mining of iron ore in Odisha would practically cripple the iron and steel industry in the country

Odisha is India's largest iron ore producer, accounting for nearly 45% of production of 145 million tonnes. Besides iron ore, it is also the large producer of chrome and bauxite. There is the fear that a total ban on mining of iron ore in Odisha would practically cripple the iron and steel industry in the country.

It is generally believed that more than 100 illegal mining operations are being carried out in Odisha leading to environmental degradation. It may be recalled that the Supreme Court lifted the ban on iron ore mining in Karnataka a few months ago, and the industry is limping back, though normalcy will take a few months more to achieve. In the meantime, only a few weeks ago, iron ore mining operations in Goa was lifted, though with conditions, where the industry feels that it would be a good six months or so before some semblance of normalcy can be expected there. As reported in Moneylife earlier, there are chances that the cap of 20 million tonnes may be increased taking into consideration the overall impact in the country.

Today, Lawyer Prashant Bhushan, on behalf of NGO Common Cause will seek a temporary ban on Odisha mines that do not have clearances. It may be borne in mind that a total ban would hurt the domestic industry and lead to needless imports; and even if this should occur, it would be atleast 60/90 days before imported ore can reach India, during which time, the steel industry would suffer, and thousands would be unemployed, for no fault of theirs!

The state government is expected to meet the Central Empowered Committee that has been appointed by the Supreme Court to decide what interim orders could be issued.

MB Shah Commission recommendations, it may be recalled, seeks a closure of all illegal mining operations. Penalties imposed on defaulters be directed towards welfare of tribals and villagers. Petition also seeks for a CBI probe into mining and for restoration of revegetation and natural surroundings. Besides, it seeks all mined ores to be traced electronically and sold through e-auctions!

Based on the petition submitted by Prashant Bhushan, NGO Common Cause, the Supreme Court has given four weeks to both central and state governments to file their replies. It has also directed the Court appointed Central Empowered Committee to prepare and submit an interim report on mining in Odisha and also submit a list of miners who have been operating in the State without proper environmental and forest clearances. On all these matters, the Court will be hearing the case today for the interim order.

India's largest FDI of Rs52,000 crore covering the POSCO Steel plant, to be set up to produce 12 million tonnes of steel at Jagatsinghpur is stuck for the last eight years due to regulatory hurdles and delays in land acquisition. The Centre has asked the state government to resolve these issues without delay!

In the case of Jindal Steel & Power Ltd, the Odisha Directorate of Mines has ordered the closure of Sarda Mines Private Ltd's Thakurani mines, owing to expiration of environmental clearance, as on 1st April 2014, effectively cutting off supplies to JSPL, which sources all the iron ore produced in these mines!

It may be noted that JSPL was sourcing these iron ore fines for its 5 million tonnes pellet plant at Barbil in Odisha and lumpy ore for its 3 mt steel plant at Raigad in Chhatisgarh. Luckily for JSPL, it has adequate stocks on hand and the inventory is estimated at 15 million tonnes, which will be presumably transported to the pellet plant, until the formalities are completed.

One other issue that would also need government assistance is the clearance for companies working on "deemed leases". If the state government gives preference to original lease holders, the industry may be relieved but if new bidding process is to be held, this would be time consuming and may delay the starting of the mining operations, once they come to a stop.

India's export of iron ore fines has gone down to 16 million tonnes in 2013 against 108 mt in 2010. Compare to this poor performance, Australia exports 600 million tonnes, while Brazil runs second at 300 million tonnes.

Now the issue at stake is not how much India can export. What is of paramount importance is to keep the Indian steel industry going. We must remember that it took months when mining activity came to a stand still in both Karnataka and Goa. As we mentioned before, Karnataka has not yet realised its full potential, while Goa would take another six months or so before some activity can be seen, since a lot of formalities have to be completed for the existing mine owners, particularly those who have proper documentation and clearances. Of course, it is imperative that illegal mining activity must be stopped; but those with the least "lapses" in terms of compliance of formalities should be permitted to commence their operations.

A total ban would affect the industry and thousands employed, besides loss of revenue for the country.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


Dangers of a slowing Chinese real estate market

The slow down in Chinese realty is not critical at least in first tier cities. But many smaller cities are severely overbuilt and a correction is likely. And any air coming out of a Chinese property bubble will have an impact far beyond the courty

Real estate is the probably the most important sector in the Chinese economy. Real estate construction accounted for about 16% of the Chinese gross domestic product (GDP) last year. A level that approaches the levels in Ireland and Spain before their housing bubbles imploded. Not only is it important to the economy, it also represents the main support for local governments. Land sales and property related taxes provide 38% of the total government revenue. This is particularly important for heavily indebted local governments. They rely on it not only for the income. They also have used the high valuations on land to as collateral for their loans. Given its importance, any wobble in China’s real estate market will have significant consequences.


But is there any need to worry? According to the latest official data, house prices in China’s 70 biggest cities rose an average of 0.3% in February alone to 8.7% from 9% in January. The annual increases in Beijing, Shanghai and Shenzhen region were 10.3%, 13.1% and 12.8%, respectively. According to Wang Jianlin, a developer and China’s richest man, “There are only two possibilities to explain why people are predicting a collapse of Chinese real estate. Either they have ulterior motives or they have insufficient intelligence.”


Is Wang Jianlin right? With such continued strong growth is there any reason to suspect problems? To start with, the growth figures for Chinese cities are actually slower than for the US housing market. The Standard & Poor’s/Case-Shiller index, which tracks property values in 20 metropolitan regions across the US, rose 13.4 % on an annual basis. Monthly increases in the price of US during the first quarter rose 0.4% also faster than China.


If there is cause for concern it is the slow down in the rate of growth. The blistering pace of growth in 2013 has begun to moderate. The number of Chinese cities experiencing growth reached a 13-months low. The problems are not in the large cities. As the size of the market declines, the problems rise. Prices in first tier cities are strong. Prices in second tier cities are shaky. Prices in third and fourth tier cities are starting to decline.


Growth in land prices has also started to slow. They have declined from 2.6% growth in the fourth quarter to 2.1%. This is the first slowdown since 2012. Such a decline would hardly be noticed except for the collateral issue. Many local governments need to refinance. Falling prices of their collateral won’t help.


Though prices are generally increasing, sales are not. Property sales gained 26% in 2013, but they have slowed substantially since then. This is true not only in smaller cities but in Beijing and Shanghai as well. Beijing had a 65% fall in sales of pre-owned homes and a 56% fall in sales of new homes in the first quarter. Shanghai had similar numbers: a 56% fall in pre-owed homes and a 40% fall in the new home market. The average fall in sales for the top ten tier one cities was 20% in the first quarter. The first six days of April saw a decline of 23% in 42 cities.


With all the declines, it is surprising that prices haven’t fallen as well. Price cuts are rare in China and only used as a desperate measure. Most developers faced with slow sales start with discounts or extras. For example in Qinhuangdao, east of Beijing, two large developers, Evergrande and Vanke, are in a price war with their smaller competitors. A Chinese price war does not necessarily mean a fall in price. Instead it usually means a rise in discounts or extras. Vanke offers Rmb 50,000 in cash rebates. Evergrande’s offer is to pay for two thirds of the 30% down payment required by law until construction is completed in a year. In other lethargic markets, developers are offering free interiors, household appliances or parking spaces.


Another problem is President Xi’s fight against corruption. With limited investment options, real estate is a preferred place to put your funds, even if you made the money in ways that weren’t exactly honest. The government is presently implementing a property registry system and will probably force government officials to register their assets in an attempt to clamp down on corruption. The possibility of exposure will induce many officials to sell the luxury apartments they own and not buy more.


So far the slow down is not critical at least in first tier cities. But many smaller cities are severely overbuilt and a correction is likely. But any air coming out of a Chinese property bubble will have an impact far beyond China.


Thanks to the generosity of central bankers, investors, especially in Asia, have been searching for higher yielding investments. The result is an extensive direct exposure to Chinese property companies through their bonds. Chinese developers have dominated the Asian bond market. A fifth of all non-financial bonds sold by companies across Asia in 2013 came from Chinese real estate companies. They provided more that 40% of new issuance. All of this debt added up to $48 billion of US dollar bonds and $6 billion in renminbi denominated debt. In addition to the bonds, there is probably another $30 billion in syndicated offshore loans outstanding.


The US debt must be a real problem since renminbi fell as low as 6.2509 renminbi against the dollar this week. This is the weakest since 12 December 2012 when it hit 6.2588 yuan. That is a loss of 3.1% for 2014, which more than offsets last year's 2.9% gain. The renminbi is now Asia's worst performing currency.


With the property market softening, the bonds are deeply underwater. Vanke and Evergrande are the largest and second largest real estate developers in China. Country Garden is number eight. Their bonds trade at about 92 cents on the dollar a fall of 8%. Bonds of smaller developers have fallen further. Developers’ shares have fallen along with their bonds. The shares of Evergrande and Agile, the ninth largest developer, have fallen by a quarter.


To their woes, the Chinese government has tightened credit. Data released on 15th April showed that total social financing, the widest official measure of credit, fell by Rmb 560 billion ($90) billion or 9% year on year. In contrast, the US taper has been slowing at only $10 billion a month since the beginning of the year.


Worse, much of the credit from the shadow-banking sector has disappeared. Non-performing loans at Chinese banks have been rising. They have already been discouraged from lending to developers. The main alternative was the shadow banking system, but new loans have declined 78% year on year. New loans are also more expensive. Trust loans are extended for interest rates of about 11%.


With all the problems, there is always the possibility that a slow down could turn into a collapse. This is especially true in China where local debts are so intertwined that the collapse of one company can lead to the collapse of many more. In the past the Chinese government has prevented a hard landing by just issuing more debt. But there is a limit to this policy. It now takes three yuan of debt to produce one of growth. So eventually it has to stop. Whether that time is now, will become evident quite soon, but the signs are certainly ominous.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)


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