Mineral Price Index: A Pragmatic Step for Mineral Development in India

 

-        Rajesh Deoliya

[rajeshdeoliya@gmail.com]

An Index is indication of a value and performance of an asset and commodity with reference to certain predefined parameters. Index gives idea of behavior of specified commodity or asset in the time and space and help in quick and rational decision making. Index also help in planning purposes in the production schedule of minerals where grade and mineral conservation is prime concern in-turn it also helps in sustainable mining. Therefore, when government of India recently introduced National Coal Index (NCI), it is considered as a pragmatic step to help coal miners and government to decide the coal block bidding parameters. Now there is proposal for National Mineral Index.

The National Mineral Policy, 2008 and 2019, says that “the approach shall be to make available mineral based material to domestic users at reasonable prices as determined by market forces”, and further states that “prices should reflect their value … ". The  old mineral laws were not defining the mineral pricing methods.

NCI is continuous exercise to decide cost of  coal  which is reliable and accepted. The Ministry of Coal on 4th June,2020 rolled out National Coal Index considering the year 2017-18 as base year. The index is the weighted average of change in price level of coal based on the price level of FY-2017-18. It is applicable to Non-Coking Coal and Coking Coal extracted and sold by Coal India and its subsidiaries. It considers various channels of transaction, and express  weighted sum as a percentage of the corresponding sum at a chosen base period. The channels consist of combinations of different types of transaction (import/ auction/ notified price), types of coal (coking or non-coking), quality grades and the different coal producers. The weights, represent the importance given to different channels. The NCI come with two sub-indices  for coking coal and three sub indices for non-coking coal, further sub indices are possible in future as and when required  like at present they are notified price, auction price and import price ( source: Discussion Paper - Auction of Coal Mines for Sale of Coal)

Mineral Pricing System in India:

The present system of mineral price reporting is buyer and seller based which consider demand and supply along with various factors coming during one to one negotiation. Since about 55 minerals are part of Schedule – II of MMDR, 1957 and their average sale price is reported by  the Indian Bureau of Mines based on the information collected by the reporting mine leases, many times it is not truely reflecting the market behavior and does not serve any bench-marking. For coal since 1945, the price at which the various types and grades of coal were sold was controlled by the Central Government, under the provisions of Colliery Control Order of 1945. Such type of regulations were not available for minerals other than coal and lignite. Beginning in March 1996, the Government gradually deregulated the price of various types and grades of coal. The pricing of coal in India was completely deregulated pursuant to the Colliery Control Order, 2000 with effect from January 1, 2000. ( source:  Report on Competitiveness on coal sector, February, 2012, Ministry of Corporate Affairs, New Delhi). The Coal pricing till the declaration of NCI was entirely dependent on the price notified by Coal India Ltd and quoted in the E_Auction by prospective buyer. For other minerals there had been no pricing structure which can decide the payments to government till the IBM started declaring average mineral prices after introduction of mineral auction for specified minerals. The prices which are reported to IBM by mining lease holders are negotiated prices between buyers and sellers and invoiced. These are dependent on several factors mainly being demand and supply and has wide variation of grade with no bench-marking. The average sale price for common understanding is okey-dokey but for the purpose of  price based payment system as in the case of  upfront payments in the mineral auctions it has been an issue of high criticism as it was found that the notified prices do not represent the majority of transactions which is in huge volume. For example, the captive mines do not raise invoices to the end user company which they are themself and hence mineral like limestone is technically traded at Zero price to its end use plant. The pit head cost of raising is hardly Rs 200 per tonne while the IBM Sale price for such limestone mineral may be ranging Rs 400 plus per tonne forcing the bidders to pay abnormally high price in the form of payments which is incorrect. Such high price of minerals are due to the contribution by the small mine owners who sale their mineral in the open market at high price. Hence, India’s mineral pricing system lacks objectivity and transparency, resulting in an unhealthy tussle between mining companies, user industries and government.

The Sale Price and Payment Related to the Royalty of Mineral:

The National Mineral Index, if implemented will certainly affect the payments to government which are linked with the royalty and average sale price. Since payment to District Mineral Fund (DMF) and National Mineral Exploration Trust (NMET) are linked with Royaly, any change in royalty due to NMI will affect these payments to government and hence the revenue of the government may be affected it may increase or decrease. If due to the NMI the statutory payments are coming lower side than industry will certainly welcome. However, it would be interesting to know once it is finalized.

The rule 39 of Mineral Concession Rule, 2016 illustrates various modes of  payment of royalty which are related to the sale pattern of mineral.

 

(1) In case processing of run-of-mine is carried out within the leased area, then royalty shall be chargeable on the processed mineral removed from the leased area.

(2) In case run-of-mine is removed from the leased area to a processing plant which is located outside the leased area, then royalty shall be chargeable on the unprocessed run-of-mine and not on the processed product.

(3) Wherever the Act specifies that the royalty in respect of any mineral is to be paid on an Ad valorem basis, the royalty shall be calculated at the specified percentage of the average sale price of such mineral grade/ concentrate, for the month of removal / consumption, as published by the Indian Bureau of Mines.

(4) Wherever the Act specifies that the royalty in respect of any mineral is to be paid based on London Metal Exchange or London Bullion Market Association price, the royalty shall be calculated at the specified percentage of the average sale price of the metal for the month as published by the Indian Bureau of Mines, for the metal contained in the ore removed or the total by-product metal actually produced, as the case may be, of such mineral for the month.

(5) Wherever the Act specifies that the royalty of any mineral is to be paid on tonnage basis, the royalty shall be calculated as product of mineral removed or consumed from the lease area and the specified rate of royalty.

The category of minerals and their sales price calculation :

The second Schedule of Mines and Minerals (Development and Regulation) Act, 1957 list 55 minerals and price consideration for payments of Royalty:

Mineral Pricing- Ad valorem

Mineral Pricing-London Metal Exchange

Mineral Pricing-

Per Tonne

Mineral Pricing – London Bullion Exchange

Mineral Not included in list

Apatite and Rock Phosphate

Barytes

Bauxite- Non Metellic

Ilmenite(Rutile,Zircon)

Cadmium

Calcite

China Clay- Kaolin

Chromite

Columbite-Tantalite

Diamond

Felspar

Fire Clay

Fluorspar (Fluorite)

Garnet

Gypsum

Iron Ore

Magnesite

Manganese Ore

Mica-Crude

Pyrite

Pyrophyllite

Quartz

Ruby

Silica Sand

Sillimanite

Talc(Steatite, Soapstone)

Vanadium

Vermiculite

Wollastonite

All minerals – listed in this list

Bauxite-Metal Grade

Copper

Nickel

Lead

Silver

Tin

Zinc

Asbestos

Clay others

Dolomite

Dunite

Graphite

Limestone

Lime Kankar

Lime Shell

Marl

Monazite

Ochre

Sand-others

Sand for stowing

Shale

Tungsten

Slate

Gold

Coal-Lignite

Uranium

Total=29

7

16

1

2

National Mineral Index - Grade Based:

There is proposal from Government of India to bring National Mineral Index (NMI)  in line with the Nation Coal Index, though the things are at very incipient level but certainly a concrete step is being taken by government. Since NCI is already working, it is expected that this might serve as platform for many reforms in mining sector because businesses are price oriented and price sensitive also. As the NCI  consider broad categories like Non –coking grade G1 to G6 ( GCV range  7000 to 5501 ),  Non-coking grade G7 to G14 ( GCV range 5500 to 3101), Non-coking grade G15 to G17 ( GCV range 3100 to 2201),  Coking coal ST-I ( ash content < 15 percent) and ST II ( ash Content < 15 to < 18 percent),Coking coal W-I to W-IV ( ash content 18 percent to 35 percent). The same concept is expected to be extended for designing National Mineral Index, where minerals shall be reclassified into precise grade groups and thresholds.

Development and Regulation Agency:

The National Coal Index was developed by Indian Statistical Institute, Kolkata and Ministry of Coal, in similar line it is expected that the National Mineral Index will be developed by Indian Statistical Institute and Ministry of Mines in consultation with the state governments and stake holders. It shall be regulated by Indian Bureau of Mines as it is current practice.

Advantage:

The National Mineral Index is likely to improve the mineral reporting system. Some advantages which are envisaged in this incipient stage are:

1. It may be mandatory for every mine lease holder to report the sale of mineral even in zero sale situation.

2.  The calculation of royalty and other statutory payments will be easy.

3.  Authenticated sale and purchase data will be available which will help in maintaining of demand and supply.

4. It will help in conservation of minerals as nobody will like to waste a high grade mineral in where low grade mineral is required.

5. The present system of calculating value of mineral resource will be appropriate as in today's scenario low grade mineral is also valued as high mineral.

6.  The use of automation in mining sector is envisaged in systematic and scientific mine planning which will provide better blending options.

7.  The mining plans to have many stakes based on the value of minerals.

8. The payments of upfront amount and performance security are likely to reduce drastically because each grade will have different price tag and its total will form the basis of calculation of payments.

9.  The NMI may lead in future to mineral trading platform.

10.The valuation of mines during merger/demerger will be easy.

11.The mines are likely to be more compliant to statutory clearances and permissions.

12.During prospecting and exploration time the thrust on application of best analytical methods at best laboratory will increase. .

13.During sampling and analysis in prospecting and exploration work preference would be given to analyze entire core instead of physical identification basis.  

 The proposal of introduction of NMI is a welcome step and hope it will boost the mining sector.

 

***

 

 

 

Comments

Niraj Chowdhary said…
Very well explained in very simple form which could be understood even by a layman.
I would thank you on behalf of all.
Well done Sir.
Paresh Raja said…
Good write-up. National Mineral Index will reduce the cost of mineral and improve the profitability of companies.

Look forward for new article
VINOD KUMAR MITRA said…
Very Informative article, Please keep sharing so that I keep on updating my knowledge.Hopefully it will rationalise the mineral prices

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