Last month, in a key policy change, the government opened up coal mining to Indian and foreign companies in the private sector. This move, which will break the monopoly of state-owned miner Coal India, is driven by the need to address the increasing demand-supply gap for coal in the country.
Earlier, private players were allowed mining operations but this was restricted to meet captive needs. The recent policy allows mining by private players without end-use restrictions.
Since nationalisation of the coal sector in 1973, the chunk of India’s coal supply comes from Coal India Ltd. Of the total coal produced in India in FY 2017, Coal India’s contribution was more than three-fourths. Much of the remaining also came from a Coal India subsidiary — Singareni Collieries Company. Private sector players that mined for captive purposes accounted for a relatively minor portion (less than 10 per cent) of the country’s total production.
Demand-supply gap
Coal India operates 82 mining areas spread over eight States. As of April 2017, the company had 394 mines (193 underground, 177 opencast and 24 mixed mines). Coal India supplies around 77 per cent of the coal produced to the power sector and the remaining to other sectors such as steel and cement. Of the total installed capacity in the power sector in India, over 60 per cent is coal based.
Coal India produced about 384 million tonnes (mt) in the nine months ended December 2017 against 378 mt in the corresponding previous period. It has a production target of 1 billion tonnes by FY2020. This seems quite ambitious, but the company should continue increasing output at a good pace.
Despite increase in the company’s production over the years, there is a demand-supply gap for coal in the country. Demand has been increasing over the years — from 702 mt in FY 2013 to 885 mt in FY 2017. During this period, India’s coal production also increased — from 556 mt to 725 mt. Coal India’s output rose from 452 mt to 554 mt in this period. Despite this increase in supply, the shortage is due to inadequate infrastructure for coal evacuation, rail rake availability issues and sudden sharp spikes in demand. The shortage has affected companies in the power, steel and cement sectors.
Increase in imports
The gap in coal supply is met through import of coal. Imports increased to 160 mt in FY 2017 from 146 mt in FY 2013. They spurted to 218 mt in FY 2015 due to sharp demand spikes but moderated thereafter in FY 2016 and FY 2017 with increasing contribution from domestic production. Privatisation is expected to further increase domestic coal supply and help cut down the imports further.
It is hopes the new policy will address the key problem of supply shortages. The move to allow the private sector to commercially mine coal should boost production and mining efficiency. Rating agency Crisil expects that the substitution of imported non-coking coal with domestic production could save roughly ₹30,000 crore of coal imports. It expects the participation of private miners to increase competition, and enhance productivity by facilitating the use of latest equipment, technology and services through higher investments.
The policy should attract not just domestic players, such as the Adani Group, but also foreign majors such as Rio Tinto, BHP, Anglo American and Glencore.
The policy places no restriction on sale or utilisation of coal from the coal mines; this will allow the miners to sell coal at competitive prices. This should aid companies in sectors such as steel, cement and fertilisers.
The chunk of Coal India’s supply is to the power sector (about 74 per cent) that gets preference in supply. The remaining is to sectors such as steel (8 per cent), cement (5 per cent) and others. Enhanced availability of coal due to commercial mining should aid all these sectors. Improved raw material availability at competitive prices should, in turn, aid the financial performance of companies in these sectors.
States with large coal reserves should also benefit from the privatisation of coal mines, since the revenue from the auction of coal mines would accrue to these States. In particular, eastern States with huge reserves are expected to be big beneficiaries. So far, royalties have been paid to the governments by Coal India and companies mining coal for captive consumption. The auctioning of coal mines is based on ‘ascending forward auction’ wherein the main bid parameter will be the price offer in ₹/tonne that will be paid to the State Government on the actual production of coal.
No major impact on Coal India
Despite the move that will break its monopoly, Coal India should not be badly dented. That’s because the PSU major has long-term fixed supply agreements with large power producers that give it good revenue visibility. Also, the company still has huge reserves of relatively high-quality coal that should help it increase production and hold it in good stead despite the entry of private players.
Challenges
While the entry of private players should speed up coal production in the country, concerns still remain. These include issues around land acquisition, mining approvals and rail rake availability to evacuate the coal. Unless these issues are addressed, the benefit of opening up the sector may not be fully realised.
Besides, it remains to be seen whether private players, especially foreign majors, will be game to bid for mines auctioned under the new policy. The quality of coal available will be a key deciding factor. Some reports suggest that Coal India retains most of the high-quality mines.