Home » COMMERCIAL COAL MINING Necessary Certainly, But is it Timely?

COMMERCIAL COAL MINING Necessary Certainly, But is it Timely?

COMMERCIAL COAL MINING  Necessary Certainly, But is it Timely?

Coal mining activities by definition are commercial, but in India this has come to define the right of a coal miner to sell the products in open market. Dipesh Dipu raises questions over who would buy coal from a commercial miner with a 20 per cent premium over market price, when they can get coal on market price from CIL?
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<p> As per the Annual Report (2016û17) of the Ministry of Coal, coal reserves stood at 308.802 billion tonne as on April 1st, 2016, based on an estimate by the Geological Survey of India. Coal India Ltd (CIL) produces over 84 per cent of the country’s entire coal output, virtually fuelling and empowering the power sector in the country. In the various cases that the Competition Commission of India (CCI) and the Competition Appellate Tribunal have heard against CIL, it has generally been agreed that CIL has a dominating presence in the production and distribution of coal. </p>
<p>In case no. 10 of 2017, CCI observes that Singareni Collieries Company Ltd (SCCL) is engaged only in the business of mining and extraction of non-coking coal and therefore it is a competitor to CIL and its subsidiaries. </p>
<p>Yet, due to its limited market share of just about 10 per cent, it is not significantly dominant and coal market cannot be considered competitive. It has been argued that due to holding such a dominating position in the market, CIL allegedly has compromised on quality, overpriced its products and engaged in unfair business practices. These premises have been challenged by CIL and cases are being heard in appropriate forums. Yet, there is no denying the fact that CIL holds the lion’s share of domestic thermal and coking coal markets.</p>
<p> <span style="font-weight: bold;">CIL monopoly </span><br />
The existing state of monopoly clubbed with large demand has resulted in rationing of coal by CIL. Rationing is done through linkages or fuel supply agreements (FSAs). The linkages have to be converted to FSAs with coal suppliers after the end-users meet the project milestones. As a part of the process, CIL gets to access all pertinent information about the entire market space of buyers and may decide to price its products specifically for segments or even individual buyers, which may reflect in second or third degree price discrimination. </p>
<p>There is another facet to this lack of competition. It has been stated in several reports assessing physical performance of CIL over the years that labour, equipment and other capital asset utilisation and productivity are relatively low in CIL in comparison to that of global players. One of the reasons why CIL favours the contract mining or outsourcing model for development of new projects is its keen desire to tap labour and capital asset productivity and arbitrage opportunity that such partnerships with private players are likely to provide. </p>
<p>Hence, there may be a case for enhancing the competition in coal sector in India both from the perspective of the consumer and from that of enhancing CIL’s performance as a government-owned miner with efficiency of operations matching its global peers. So the proposal for commercial mining of coal is welcome.</p>
<p> Commercial coal mining The Ministry of Coal published a white paper titled,’Auction of Coal Mines for Commercial Mining’, in March 2017 for public discourse and suggestions on policy initiatives that purport to bring in private participation in commercial coal mining. ‘Commercial’ coal mining is a bit of a misnomer here as all coal mining activities by definition are commercial, but in India this has come to define the right of a coal miner to sell the products in open market. Here again, the permission to sell coal in the open market, which ideally should imply freedom to price products based on market demand and supply, has turned out to be a debating point for policy-makers. The Indian coal sector has contextualised the essential features of a free market that define commercial activity through the deep impact of nationalisation of the industry in the early 1970s.</p>
<p>The so-called commercial coal mining itself is not a new concept either. Prior to de-allocation of coal blocks by the Supreme Court of India, and indeed even after the new legislative framework has been approved by the Indian Parliament, several coal blocks were and have been allotted to state-owned entities for commercial mining. A closer look at these entities and their strategies for coal mine development indicates that contract miners are the ones who operate the coal mines and the state entities bargain with potential buyers of coal for a share of rent from the price of coal they sell. So, while private sector ownerships of these coal mines have been restricted, there is no constraint on private sector participation, which extends from mine development and construction to transportation and taking the products to the market.</p>
<p> <span style="font-weight: bold;">Pricing of coal</span><br />
The Ministry has recently proposed to allow private sector ownership. The draft policy paper proposes no restriction on pricing even for purposes of revenue share, which is also the bidding criterion for allocation of coal blocks in the first place. A floor price of 20 per cent premium over CIL prices for comparative coal quality has been proposed. There are other provisions for flexibility, such as permission to modulate coal production within a limit of 70 per cent of the approved peak rated capacity. While the merits of these propositions are being discussed, it is important to question the fundamental idea of commercial coal mining at this time.</p>
<p>There is a revolution that is sweeping the energy sector globally and in India. The balance now seems to be conclusively tilting towards renewable energy. And, this development is not entirely due to government subsidies, but because these sources of energy are financially viable on their own. Of course, there are some concerns about the quality of supply and backup, but there again a lot of investment is being made, for example, for developing grid-size storage technologies for solar power. The next 3û5 years are likely to witness epochal shifts in the way energy is generated and distributed. Coupled with these developments, coal mining in India has witnessed lower than expected demand. CIL was struggling to meet the demand just a few years ago but now they are increasingly finding it tougher to dispatch the coal produced, resulting in building up of stockpiles. But in spite of this, there has been no indication yet on relenting on their pursuit for a 1 billion tonne production by the terminal year of the current five-year plan. This begs the question then of demand from commercial coal miners. </p>
<p>Who would buy coal from a commercial miner with a 20 per cent premium over market price when they can get coal on market price from CIL? And, this also raises the associated question of being able to get a premium, when there is over supply in the market.</p>
<p><span style="font-weight: bold;"> Cost side</span><br />
Then there is the cost side of the story. While the list of coal blocks for commercial coal mining is not yet published, it may only be speculative to estimate costs. But it may well be stated that the costs of coal mining may be relatively lower than that of CIL considering private sector efficiencies. But the margins may have to be distributed between the miners and the government accounting for the revenue share or an auction premium, depending on how these coal blocks are auctioned off. Would the available margins be able to justify investment in coal mining ventures that have tuned out risks of obtaining social license to operate, including land acquisition, rehabilitation and resettlement; of mine permissions such as environmental clearances and of infrastructure development constraints?</p>
<p>Answers to several of these questions are likely to be found in the location and geo-technical features of the coal blocks. Demand and price risks and the risks in coal supply logistics can be accessed from the location of the mine and its likely markets. The margins and returns on investment can be gauged by the geo-technical features, which impact the ease and hence cost of mining. To attract investors, it is therefore important that the government chooses coal blocks that promise scalability, higher degree of geological information, lower risks of stakeholder management and shorter gestation period to get the first tonne of coal to market.</p>
<p>The key reflection of expected returns would also be the degree of competition for these coal blocks. The competition for the most recent, the fourth round of coal blocks for non-regulated sector was low and response for the blocks offered was at best lukewarm. While the past need not reflect the current level of interest, expectation of the future of coal, more specifically coal-based power generation, is certainly going to impact the prospects. The real concern lies here: Central Electricity Authority (CEA) has warned that coal-based thermal power plants are expected to see a drastic fall in capacity utilisation to as low as 48 per cent by 2022, which has been consistently declining for the last 3û5 years, as additional non-thermal electricity generation capacities get commissioned and are more likely to deter enthusiastic participation. </p>
<p>All said, competition in coal markets in India is acceptably necessary but the form of competition through auction of commercial coal blocks would need market test, as markets alone are the places for real test of an idea. It is, therefore, wise to wait and watch if commercial coal mining is such an idea whose time has come or has passed by already.</p>
<p> <span style="font-weight: bold;">Author: </span><br />
Author is a mining engineering graduate from Indian School of Mines, Dhanbad, and is a management consulting professional with more than 15 years of experience in advising clients in infrastructure, energy and resources sectors.</p>

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