The government’s recent move to allow commercial mining of coal, and notification of the methodology for auctions sets the stage for a change in India’s coal supply paradigm. But that’s easier said than done with there being a raft of structural issues that need sorting out. The hour is propitious, therefore, to scrutinise the landscape using four lenses — supply, pricing, quality, and the interest of global miners.
For ages, the supply side has been a story of delays in approvals, land acquisition, and rehabilitation of project-affected people. Of the 89-odd coal blocks auctioned under the new regime in the past three years, only a handful have started operations. A number of Coal India projects, too, are delayed.
Today, it takes at least 5 years for a coal mining project to start commercial operations. Unless there is single-window clearance for statutory approvals, streamlining of land acquisition processes, and improvement in rail connectivity, commercial miners would run into the same challenges that have beset public sector and captive miners.
Sorting these requires political and regulatory drive. Without that, the coal supply curve is unlikely to turn for the better anytime soon. That means pricing would continue to be determined by Coal India and Singareni Collieries till the share of commercial miners in the output increases and supplies improve.
While pricing may not become competitive in the near-term, commercial mining would certainly pave the way for pricing based on energy content, or kilocalories — the international practice — compared with the grade-wise schedule applicable now. For the power sector, which consumes more than 80% of domestic coal, a material reduction in purchase costs is unlikely because commercial miners would tend to target customers that are meeting their needs from more expensive sources. Also, given that the bulk of the power generation based on coal linkages from PSUs is locked in long-term PPAs, any switch to a different coal source won’t make sense sans a material reduction in energy charges.
Then there is the vexatious issue of coal quality. Power companies have been complaining of stones and boulders in coal consignments for long. The issue is unlikely to get resolved soon because Coal India will remain the largest supplier for years. In the future, however, it is fair to presume, commercial miners could offer more reliable supplies.
As for mine auctions, success would depend on the quality of the blocks being offered and the geological information made available to bidders. To attract global players, extensive geological information on coal blocks, promise of scalability and adequate evacuation infrastructure are imperatives. Success would also depend on the consistency of regulations and security of tenure. The spate of cancellations of coal and iron ore mining projects in the recent past, and embargoes on production in certain cases through judicial interventions, have made the whole proposition riskier.
The upshot is that commercial coal mining will not lead to a drastic increase in supply in the next 7-10 years as structural glitches are ironed out. As for pricing, while the cost structure of mines will have a bearing given the coal deficit scenario in the country, quotes by commercial miners would tend to be higher.
For sure, commercial coal mining will expand domestic supplies and set new benchmarks in mechanisation, automation, good mining practices, and therefore drive up productivity. It may also lead to flexible supply contracts and pricing. And as calorie-based pricing becomes a sine qua non, and as supply expands, other quality parameters such as ash and sulphur content would also become important determinants of the price discovery process.
But we are a long way from there.
By Satnam Singh
The writer is director, Energy and Natural Resources, CRISIL Infrastructure Advisory