Shielded from competition, CIL output stagnates amid half-baked govt measures

Written by Noor Mohammad | Noor Mohammad | New Delhi | Updated: May 24 2013, 08:07am hrs
Indias energy sector is at crossroads. On the one hand, there is a growing realisation (followed by more determined policy action) that prices of electricity need to be rationalised, and on the other, the huge spike in prices of key fuels like coal and natural gas sourced from a variety of destinations domestic and overseas is threatening an emerging regime where fuel costs would be a pass-through item for energy majors. In the second part of a series on fuel choices for the thermal power sector, FE dwells on what constrains domestic coal output and how to remedy the situation

Coal India, the country's monolithic commercial miner, beneficiary of an opaque pricing policy largely separated from global market, is reporting flat production growth over the last half a decade at least. It takes refuge under the Coal Mines Nationalization Act, which keeps competition from the private sector at bay, and smugly refrains from the potentially production-enhancing underground mining, citing India's geological conditions.

Circumventing the politically volatile proposal of allowing private players in commercial coal mining, the government has made some efforts to bring more players into the sector by allocating captive coal mines to PSUs and private coal users (it's another matter the process of allocation has received flak from the CAG and the Supreme Court for its non-transparency and alleged arbitrariness) and allowing commercial coal mining on a limited scale by state-level public-sector entities.

But it is very clear that these have had only limited impact and the global mining giants like Rio Tinto and BHP Billiton would settle for nothing less than commercial coal mining licences when it comes to investing in India's coal sector. Of course, the Centre is now planning to introduce a modified public-private partnership (PPP) model to boost coal production, which would involve a concession agreement between CIL and private firms, where sale of fuel would continue to be the PSUs prerogative. The government hopes that long-term concession agreements of 30-35 years would allow technological investment by global players in India's coal sector, without violating the sanctity of the Coal Mines Nationalisation Act. Few analysts would, however, bet on even this modified model.

Under pressure to meet industrys rising coal demand, CIL is now scouting for coal assets abroad. Backed by a war chest of $ 6.3 billion (R35,000 crore), the company is focusing on coal-rich countries Australia, Indonesia, Mozambique, South Africa and Colombia. It has already received at least 15 asset sale proposals from coal mining companies in these countries, according to industry sources. How far this would help the company to augment output remains to be seen.

CIL's coal production stagnated at 431-435 million tonnes between 2009-10 and 2011-12. In 2012-13, its output increased but still fell short of the target. The state-owned company produced only 452.19 million tonnes of coal in 2012-13 against the target of 464.1 million tonnes.

N Kumar, director ( technical), CIL, told FE: We have 126 new and 148 ongoing projects, which will help us meet the production target for 2016-17. The company has been given the target to produce 615 million tonnes of coal in the terminal year of the current Plan. About one quarter of the country's 293 billion tonnes of explored coal reserves is lying below 300 meters of depth and cannot be tapped due to CIL's lack of expertise in underground mining. International miners can help CIL in extracting this coal by sharing their mining practices which are considered globally best.

CIL extracts more than 90% of its coal by using opencast mining technique. If it switches over to underground mining, it would not help the company in stepping up production. Underground mining, though environment friendly, is costly and requires trained manpower unlike opencast mining.

CIL's underground mining costs are nearly seven times its average opencast mining costs. For example, the company's underground mining cost was estimated at R4,630/tonne of production in 2011-12, compared with R693/tonne for opencast mining. CIL's average weighted mining cost for the year was R1,037/tonne, according to company sources.

CIL says that underground mining is not feasible in India given that the bulk of coal reserves are located at a depth less than 300 meters. However, industry watchers differ. For one, the Planning Commission has favourd adoption of underground coal mining technology for environmental reasons. Anyway, prior to nationalisation of the sector, majority of coal mines in India were mined through underground mining technique.

The Centre's new PPP model in coal mining does not envisage equity participation in mining ventures for private players. They will have to bid for projects on the basis of per tonne cost of production, and the right to sell coal would be with the CIL. We need increase in both number and quality of private players whose focus would be on bringing global practices into coal mining, said former CIL chairman PS Bhattacharrya.

Mining costs may vary from mine to mine, depending on technical parameters like stripping ratio ( the ratio of coal and overburden) and project size. So it would not be possible to make an apple-to-apple comparison between mining costs of CIL and international miners.

CIL's coal mining is labour intensive, while international players like Rio Tinto and BHP Billiton follow capital intensive techniques. As a result, the latter's per man mining productivity is much higher compared with CIL. Lack of mechanisation is a constraint to expediting coal production. We should start getting technology for underground mining now, Bhattacharyya told FE.

Significantly, unlike international miners who are exposed to price risks, CIL is fully insulated from market volatility because its price is fixed. If coal prices fall in the international market, CIL is not obliged to lower its prices accordingly. This mechanism has proved a big advantage for CIL. For example, CIL charges import parity price for its superior (A and B grade) coal. But it has not bothered to bring down price of these categories of coal in response to the recent decline in international coal price. Coal pricing is deregulated in India

since 2000. In other sectors like petroleum where import parity pricing is in vogue, it cuts both ways.

Supporting CILs overseas ambitions, the government has already dispensed with the stipulation that only listed companies can be considered for acquisition. Now it is mulling diluting the rule that requires public sector undertakings ( PSUs) like CIL to ensure minimum 12% return on equity. Significantly, CIL is pursuing overseas acquisition on its own after International Coal Ventures ( ICVL), a conglomeration of central PSUs, including CIL, set up by the government to acquire coal assets overseas, proved a non-starter.

CIL is also keeping on hand an army of investment bankers for conducting due diligence quickly when first intelligence on availability of assets arrives. That would help it start early negotiations with the sellers and steal a march on competitors in clinching the deal, according to industry experts. It has already empanelled as many as 13 merchant bankers to advise it on overseas deals and initiated process to bring five more on the panel.

As of now, CIL has only two overseas mines, both in Mozambique, where production is expected to start in 2016. Clearly, more pragmatic policies are needed to step up India's coal production and sourcing of imported coal.

(To be continued)