Coal sector gets a fresh lease of life. India has to do more

In a significant move, the Union Cabinet on January 8, 2020, cleared an ordinance that throws open coal mining to non-coal companies while removing restrictions on end-use of the fuel with an aim to boost investment and output.

It approved promulgation of the Mineral Laws (Amendment) Ordinance, 2020, to amend the Mines and Minerals (Development and Regulation) Act, 1957, and the Coal Mines (Special Provisions) Act, 2015.

The backdrop is grim. The government has been able to reallocate only 89 of the 204 coal blocks which were canceled by the Supreme Court in 2014. More worryingly, India’s GDP growth has decelerated to a six-and-a-half-year low of 4.5 percent in the September quarter.

India’s coal reserves are estimated at 300 billion tonnes. However, the production of coal for 2018-19 was subdued at 730 million tonnes (mt). Coal India, which employs over 3 lakh workers, produced 607million tonnes followed by Singareni Collieries (64 mt). The rest was produced by captive coal producers.

More than 50 percent of India’s total primary energy comes from coal, and India added 120GW (gigawatt) of coal-based thermal power plant capacity during the past decade. The plant load factor at thermal power plants remains depressed due to the economic slowdown.

To add to the woes, the import bill for coal rose to $26 billion in 2019, from $16 billion in 2014. According to government sources, the total coal import for 2018-19 stood at 235 mt, of which 130 mt could be substituted by domestic coal, the one with a smaller calorific value which is readily available in India.

What weighs on coal production is industrial and regulatory factors, which raises the import bill and in turn, the trade deficit. India was the second biggest importer of coal in 2019 with a global share of over 16 percent, next only to Japan.

A host of power plants have come up in coastal areas where imported coal is more competitive than Indian coal due to high transportation costs. With the right technology, coal with high calorific value can be suitably tapped with lesser cost per unit of electricity produced.

In general, most plants blend both low calorific Indian coal and the high calorific imported version to improve productivity. Also, coking coal, one of the most important requirements in manufacturing steel, is not abundantly available in India. So, the entire coal import of India is not substitutable.

India exports small quantities of coal -- $100 million as of 2019, with a 0.1 percent global share. Australia (16 percent) remains the leader, followed by Indonesia (15 percent). India’s coal export prospects look uninspiring due to surging domestic demand, sub-par competitiveness, need for better technology and lack of quality.

The government has set a target of 1.5 billion tonnes of coal production by FY24, of which Coal India’s mandate is 1 billion tonnes. It has introduced a host of reforms such as removal of end-use requirements for miners, allowing auction of coal-bearing areas to private parties for commercial mining in February 2018, which ended the monopoly of Coal India, and clearing 100 percent FDI (foreign direct investment) through the automatic route in commercial coal production for captive use by steel, power and cement, in August 2019.

Before August 2019, 100 percent FDI via the automatic route was allowed in coal and lignite mining for captive consumption by steel, power and cement companies. But the open market sale of coal had not been allowed. These restrictions acted as major FDI barriers.

Currently, 100 percent FDI is allowed in mining for sale in the open market as well as associated infrastructure like washeries, crushing, coal handling and separation. In a separate move, the Environment Ministry gave clearances to 10 coal mining projects with a combined capacity of 160 mtpa (million tonnes per annum) and 4 washeries with a combined capacity of 31 mtpa. These reforms are expected to bring in new global players and global technology used for underground mining.

India has been trying to attract global mining giants and improve the competitiveness of the sector. But so far, it has met with hard luck. A relatively high supply, squeezed sectoral margins, a move towards cleaner air, thermal power uncertainty and the government’s push for solar power are holding back global mining majors like Rio Tinto, BHP Billiton, and Glencore from committing big on India.

Coal gasification is another area the government has been focusing on to help improve productivity and reduce pollution and emissions. This helps check the reduction in the calorific value of coal between the extraction stage and the time when it reaches power plants.

Indian steel and power companies are expected to bid for new coal blocks, especially when global competitiveness of the Indian steel industry is below par and thermal power is competing with solar energy where the cost of solar cells has dropped significantly leading to competitive unit rates.

Backward integration in the industry is expected to improve reliability and margins for steel and power players. As India tries to jumpstart growth by working around the economic slump, the new reforms are expected to improve efficiency and competitiveness by bringing in more capital, transparency, global players and technology.

Authored by (at the time of writing): 

Avinash Vadapalli, Member, Industrial Goods and Services Practice 

Kaushal Patel, Member, Industrial Goods and Services Practice 

This post first appeared on money control and has been published with permission. Read the original here.

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