Commercial coal mining: A question of ecosystems

A major impending reform for the sector is fraught with doubts over demand and the robustness of the regulatory environment

Opening the coal industry for the private sector to mine and sell in the open market is a reform waiting to happen. Some questions, however, have arisen about the timing of the decision – despite the obvious benefits of better price discovery and supply in a market dominated by a state-owned monopolist.

Just a week before the Union Cabinet approved the methodology for commercial mining, Coal India Ltd released the draft Coal Vision 2030 that suggested that the country does not need new mines. The report is drafted by KPMG India, an independent agency, and would be reviewed by the coal ministry.

“The total capacity of mines allocated/ auctioned … as on date is about 1,500 MTPA [million tonnes per annum] at the current rated capacity In view of the likely demand (base case scenario), there is limited requirement of starting new coal mines except the ones already auctioned/ allocated,” said the report, which has been reviewed by Business Standard.

The report bases these estimates on several factors, the two major ones being demand from the power sector and the shift to clean energy sources such as solar and wind.

Coal India's 2018-19 production is expected to touch 650 MTPA and it aims to mine 1 billion tonne a year by 2019-20. Demand is expected to be 900-1,000 MTPA by 2020, rising to 1,300- 1,900 MTPA by 2030. On this basis, the KPMG report says there is a limited business case for new mines in the 2022-25 horizon. “It may be advisable to monitor the growth in coal demand and decide on new mines accordingly.”

So, will the government defer its plans, tentatively scheduled for the coming fiscal? In conversation with Business Standard, coal secretary Susheel Kumar said the demand for coal is market-driven, and although demand from the power sector, which accounts for a major proportion of coal demand, is currently slow, faster economic growth will accelerate demand and push the case for coal.

“If we auction commercial mines in the coming fiscal, it will take another two or three years for them to come into production. By then the demand-supply cycle would be in the positive. There is a large market available in India and we have opened it for global companies along with Indian ones with this step,” he said.

Executives of two of India’s largest private manufacturing giants with expertise in coal mining suggest that commercial mining auctions are unlikely to see the kind of rush that accompanied the auctioning of mines in 2014 for captive use in power, steel and aluminium production. This was followed in 2015 by allotments of mines to states for mining and commercial sale to medium, small and cottage industries.

“One reason is that the government is expected to auction large mines. Coal mining involves immense capital investment. Commercial coal mining and sale is viable for a large company willing to take that risk as the returns would be fluctuating because offtake is not assured,” said a senior coal-mining expert in one of India’s largest conglomerate. A large mine in this context is typically a mine with annual capacity of over 15 MTPA on average.

There are also regulatory concerns. “Most of the mines auctioned for captive use faced one problem or the other – either legal issues or state-level clearances,” said the CEO of a steel and power producer. Of the 29 captive mines auctioned in 2015, some 11 mines are embroiled in legal tussles over coal auction methodology, tenders and regulatory issues.

On the need for a coal regulator, Kumar said, “The demand for a separate coal regulator is on the table but it has no bearing with commercial mining. When needed, the proposal would be moved.”

The coal ministry is yet to finalise the terms of the auctions. The draft methodology outlines a forward auction on an e-platform. Kumar said there will no end-use and price restriction and it would be up to the players to bring down the prices in the open market. He added that the government could set up allied infrastructure such as washeries, if the players requested, and provide freedom to export. Foreign bids will also be entertained.

But there are other concerns. A K Khurana, director-general, Association of Power Producers, said: “We hope the government will learn from earlier auctions and make conditions and regulations conducive for competitive and sustainable price discovery. The objective of the auctions would need to shift from revenue maximisation to productivity and sustainability.”

“In commercial mining, there will be two more challenges — demand especially from the power sector and competition with Coal India, which has enjoyed a monopoly for 40-odd years,” said an executive.

Coal India has been the sole commercial miner in India for 41 years now with a market share of 80 per cent. The other significant player is Singareni Collieries, a joint venture between Coal India and the Telangana state government. The cumulative production from captive mines stands at 30 million tonne. Imports account for 10 to 15 per cent.

One of the problems of depending on a single supplier was seen in the last quarter when power generation dipped for the inability of Coal India to meet a surge in power demand (on account of a weak monsoon) and the railways’ inability to provide a sufficient number of rakes to transport it. Last month, the ministry of power has asked for 615 million tonnes of coal for the coming fiscal and the railways to provide 288 rakes every day to transport it.

Of the 615 million tonne demand from the power sector, 513 million tonne is to come from Coal India and its subsidiaries and the remaining from captive mines and imports. Commercial mining would undoubtedly help bridge that demand gap more effectively.