India Mining Report Q3 2009

India is home to a myriad of metals and minerals. Globally, the country is the largest producer of sheet mica, the third largest producer of coal, the fourth largest producer of iron ore and the fifth largest producer of bauxite. Besides these natural resources, India also hosts significant reserves of copper, zinc, gold and about 26 other metallic and minor minerals. The Indian mining sector is largely state-dominated, but the government is now seeking a phased withdrawal of its participation from the non-strategic metal sector in order to encourage private players to take the centre stage.

With prices dropping from the peaks seen in the middle of last year, Indian iron ore producers are finding it increasingly difficult to compete on the international markets. This is partly because China - which is the major market for Indian iron ore - is increasingly turning towards Australia as a supplier. Indeed, Chinese steel mills have invested heavily in Australian ore mines in recent years. Meanwhile, India's inadequate railway network has meant that iron ore has had to be transported large distances by road at massive cost, reducing the cost-efficiency of local producers. In April 2009, it was reported by Bloomberg that Indian iron ore exports would drop by at least 25% in the fiscal year, after competitors began offering major price discounts. The Federation of Indian Mineral Industries expects overseas sales to fall significantly from the 105mn metric tonnes witnessed in 2008.

In March 2009, it was reported by Reuters that India had not imported gold for the second month in a row with high prices scaring off consumers. By contrast, gold imports in March and February 2008 stood at 23 tonnes and 21 tonnes respectively. During the current financial crisis, gold prices have risen as investors have increasingly viewed it as safe haven. India has been a major gold importer in recent years due to the liberalisation of the economy. In 1992, the India government abolished the 1962 Gold Control Act, which prevented citizens from holding gold in the form of bars and coins and the market has grown rapidly ever since. However, in 2008 as the global economic crisis began to take old, triggering a flight to gold, imports fell 48% to 396 tonnes. In January 2009, imports were just 1.9 tonnes a fall of 89% year-onyear.

By the end of 2009, Indian gold imports are expected to stand at just 200 tonnes, according to Commodity Online India Limited, almost half of the levels seen in 2008.

The global economic downturn is also having a severe impact on India's diamond export market, which has cut its workforce by 25% in the past six months according to reports in the Financial Times in May 2009. India has around 55% of the world's diamond cutting and polishing business. The majority of stones are imported from Belgium, while India has close relation with major diamond suppliers such as De Beers, Russia's Alrosa and BHP Billion. The major export markets are the UAE, the US and Hong Kong. In the six months to the end March 2009, Indian diamond exports of cut and polished diamonds fell by 31% to US$5.2bn, as the global recession impacted consumer demand in core markets. As a result of these dismal figures the local industry halted the import of rough diamonds for a month in 2008 in order to stop a supply surplus. Total imports fell 60% in six months to March 2009, to US$1.9bn.

Global overview On page 10 of this report, BMI examines the phenomenon of increased Chinese activity in the global mining sector and what this means for the industry moving forward.

Industry Forecast The global financial crisis is having an impact on India's industrial sector. India registered a 33% yearon- year (y-o-y) slump in exports to US$10.7bn in April, the seventh consecutive monthly decline, according to quick estimates released by the commerce ministry. The country also recorded a 35% y-o-y plunge in imports to US$16bn in the same month, compared with US$24.82bn in April 2008. India had a trade deficit of US$5.3bn in April compared with US$8.75bn in the same month a year ago. According to government figures mining output fell by 2.3% in March 2009, compared to the same period in 2008.

However, despite falling commodity prices, India's mining sector should continue to post impressive over the forecast period driven by strong domestic demand. The long-term prospects of the sector - like that of the Indian economy - remains very positive. However, in 2009 growth in US dollar terms stood at just 1.6%, while growth in 2009 is expected to be negligible as the global economic crisis impacts exports in key sectors such as iron ore, bauxite and copper. The market should return to strength in 2010, and by 2013, BMI forecasts that the mining industry will reach a total value of US$45.40bn.