Concerns over Coal India’s competitive edge

State behemoth burdened with rising output cost, ageing mines, higher quality imports

In the coming years, though government-owned Coal India is poised to maintain leadership in a liberalised regime for the commodity, the world’s largest coal miner is also threatened with losing its competitive edge, primarily for technical reasons.

An internal assessment by the company in formulating a vision for the year 2030 reveals the strip ratio across its major mines is increasing substantially, which would lead to increased production cost. This ratio refers to the volume of waste material required to be handled to extract every one tonne of ore.

By the assessment, the weighted average strip ratio for Mahanadi Coalfields (MCL), the largest Coal India subsidiary, would increase from 0.9 to 1.4 by 2020. For Northern Coalfields, from 2.8 to 4. At South Eastern Coalfields, the second largest subsidiary, from the current 1.2 to 1.9.

The assessment notes this would definitely increase production costs; also, the grade of coal in the overall product mix is also likely to decline. The average current cost of production is ~1,200 a tonne.

MCL typically accounts for nearly 26 per cent of the annual production of Coal India and most of its reserves are in the G-13 grade (with a lower gross calorific value). The assessment says with the increasing share of MCL in the overall Coal India production mix, the G-13 grade will increase from the current 23 per cent to 26 per cent in the next few years. “With increasing cost of production and lowering of coal grade, the competitiveness of Indian coal and of Coal India could get increasingly constrained,” says a sector expert.

Amidst this backdrop of ageing mines and increasing production cost, an analyst from brokerage Motilal Oswal says the chances are high that private commercial miners would be offered blocks with substantial and more costeffective reserves. “Compared to Coal India’s current production cost, that for private companies will be much lower and expected to remain at the same level for some time. On the other hand, with every round of wage revision and strip ratio increasing for Coal India, its production cost will increase,” the analyst said.

A second concern will be import. Which, instead of decreasing, might increase in the long term. A section of analysts expect Australian coal prices to reduce to $60 a tonne by 2030 and the corresponding price for Indonesian Ecocoal at $30-40 a tonne. It is estimated that such price levels might drive as much as 200 million tonnes of annual demand towards imported coal.

The assessment states that unless costly mines are retired and the price of coal is corrected downward, even though the overall coal demand might grow in India, the domestic supply could be stagnant or even fall. And, with production costs to go up for the state-controlled miner, a price reduction to match import cost would be challenging. “Import substitution is one of the primary objectives for us and we need to come up with means on how to improve production and match our prices with global levels,” a Coal India official stated.

Analysts are sceptical about Indian coal faring against the black diamond from Australia, Indonesia, South Africa and others. For, Indian coal has a lower gross calorific value and more of impurities.

The Centre recently allocated 11 mines to Coal India and these are expected to add about 225 mt of coal every year to its production capacity. Leaving the recent allocation aside, the current production capacity of Coal India with other miners is 1,500 mt yearly.

A Coal India official says immediate improvement in production and control over costs requires closure of unyielding open-cast and underground mines, and a focus on coal seams which are easy to expose and mine. Nevertheless, some analysts expect Coal India to stay the leader, given its size and production volume, which no other standalone company can match.