Indian miners's low cost structure helps survival

Commodities have borne the brunt of the Chinese slowdown and European politico-economic crisis. Prices of manganese, iron ore, zinc and aluminium have dropped 10-25% over the last one year, impacting companies that process or mine these metals.

But Indian metals and mining companies may weather this phase better, with their low-cost structure. Here`s an assessment of their prospects.

Iron Ore

The prices of high-grade iron ore imported by China from Australia are down by 20% over the last one year. This dip is attributed to the slowdown in steel production growth in China and drop in European consumption. For India, global iron ore prices serve only as a directional cue. India`s largest iron ore miner, NMDC, sells ore at a discount of 35-45% to international ore of similar grade. Despite this, NMDC`s 75% margins exceed those of higher realization earning peers such as BHP Billiton, Rio Tinto and Vale.

NMDC`s other advantages include control over 40% of domestic iron ore output, which is an edge in terms of ability to hold prices steadier than volatile international prices. NMDC still remains among the best placed iron miners globally as its cost of production is low and imports too expensive to threaten prices.

Danger Zone

But Indian mining has been a regulatory death-trap for some producers. Take Sesa Goa. Its operating margins of 53-60% were not in the realm of NMDC, but still handy enough to beat miners of similar size elsewhere. Then came the mining ban in Karnataka, shutdown of an expensive mine in Orissa and an export duty hike. The company`s core operations in Goa have come under the scanner, casting a shadow over the stock. Margins in the fiscal ended March 2012 slid to 41%. As a result, Sesa Goa`s profits are under pressure

Aluminium

India has two major aluminium producers, NALCO and Hindalco. The latter is an integrated producer with captive bauxite and coal mines. This allows it to produce alumina and power at a low cost.

Aluminium producers globally have suffered from a glut of aluminium smelting capacity. In addition, competing for coal has become increasingly expensive, hurting margins.

Power is a key input for production of aluminium metal, accounting for over 30% of the cost of making aluminium. Producing alumina, which accounts for over 15% of the cost, has been no walk in the park either.

NALCO`s ageing equipment and reliance on imported coal has cost the company dearly over the last few months. Slipping aluminium prices have strained the company`s profits.

As for Hindalco, the company has been profitable so far. But its exposure to Europe and US through Novelis remains a worry. The slow pace of expansion domestically has also been an overhang on the stock.