THE GOVERNMENT, WHICH CONTROLS THE MINES AND TRANSPORTATION, HAS CREATED AN ENERGY CRISIS FOR A COUNTRY BLESSED WITH ONE OF THE LARGEST COAL RESERVES

By Ajoy K. Das, Coal Age correspondent

Dragline mining in India.

Limbo and crisis are the most oft refrains used to describe mining in India these days. It’s especially ironic for the mining sector, which boasts the fifth largest reserves in the world and remains the third largest producer in the world. Despite the height on the pecking order of endowment, India’s coal production performance has been lackluster even with coal accounting for more than 53% of the country’s primary energy needs. Coal production during 2013-2014 was pegged at 565 million metric tons (mt), barely 1.7% higher than 556 million mt recorded in the previous fiscal year.

The disparity between available resource and performance over the long term was coming home to roost with India’s import dependency increasing rapidly and the country emerging as the second biggest coal importer after China. While the Indian government does not release official coal import forecasts, industry analysts said that total thermal coal import for power generation was expected to grow 11% in the current fiscal year (2014-2015) to 150 million mt. Data sourced from Indian Ports Association (IPA) representing ports with coal handling facilities showed that during 2013-2014, coal imports were recorded at 105.7 million mt, up 17% from 86 million mt in the previous fiscal year.

“The coal sector will not be able to achieve the targeted 8% average growth set by the government for the period 2012-2017, and production targets will need to be revised downward in a review to be conducted before the end of the current year,” said an advisor to the Ministry of Coal.

He pointed out that even during the previous five-year period between 2007-2012, production targets set by the government had been missed persistently. Against government production targets of 384 million mt, 405 million mt, 435 million mt, 460 million mt and 447 million mt, actual production fell short over the five years at 379 million mt, 403 million mt, 431 million mt and 435 million mt, respectively.

In 2013-2014, Coal India Ltd. (CIL) produced 562 million mt, registering a growth of 2.3% over the previous fiscal year while second largest coal miner Singareni Collieries Co. Ltd. (SCCL) produced 50 million mt, a negative growth of 5%.

 

THE CRISIS
The dismal performance is becoming more apparent. As of October, data sourced from the Central Electricity Authority (CEA), the Indian government’s techno-economic advisory body for the power sector, showed that 60 of the country’s 103 thermal power plants had coal stocks of less than one week’s consumption, owing to shortfall in supplies from CIL. The total coal feedstock currently available with the thermal power plants had fallen to 7.2 million mt during October, the lowest stock in the last 25 years, according to the CEA.

If existing plants were in dire straits, new projects too were hanging fire from lack of coal linkages. According to Piyush Goyal, Indian minister for coal and power, 12 new power projects entailing an investment of $5.86 billion with aggregate generating capacity of 7,230 MW were ready for commissioning, but stranded in absence of long-term coal supply agreements with coal mining companies.

 

IMPORT DEPENDENCY
Supply side logjams reinforce the Indian irony of having an immense coal resource, yet recently rising to the third largest importer of coal as the only short-term solution to an energy crisis.

During April-September, domestic coal production amounted to 220 million mt, down 9 million mt from targeted levels, and imports during 2014-2015 were forecast by the government to rise 11% to around 150 million mt before moving to 200 million mt over the next two to three years.

An inevitability of import dependency, the Indian government has yet to frame a pricing strategy for imported coal supplies to power plants. The pool price mechanism for averaging low-priced domestic coal and higher priced imported coal to arrive at sales price to power generators has been opposed by several power producers as well as CIL. Government-owned and managed power producers have opposed the pool price mechanism on grounds that their plants that operate with domestic coal would be disadvantaged since coal procurement price would go up, as with regulated pricing of electricity, they would be hamstrung in passing on higher coal prices to electricity consumers.

 

THE COURT CLAMPDOWN
At a time when the coal sector was battling growth pangs and regulatory hurdles, the biggest sledgehammer blow was dealt by the country’s Supreme Court, which on September 24 ruled that all the 214 coal blocks allocated to various user industries in power, cement, steel, in private and government sectors since 1993 be canceled and put up for auction after ownership of the coal resources is taken back within the next six months.

The apex court ruled that “there was no transparency by the companies as well as the central government. On many occasions, guidelines have been breached, the approach casual and at times illegal.”

Of the more than 200 blocks the court remanded, only about 30 have been placed into operation accounting for only 0.5% of the total annual tonnage.

The Indian government will now seek Supreme Court permission to extend the deadline for private companies to pay the penalty for coal already mined from the canceled blocks. The court had directed all companies whose coal blocks had been canceled to pay Rs 295/mt ($4.80/mt) of coal already mined by March 31, 2015, and would accrue the government revenues to the tune of $2.6 billion.

A dragline moves overburden while two electric shovels load coal at a major SCCL operation.
A dragline moves overburden while two electric shovels load coal at a major SCCL operation.

 

THE IMPACT
The Indian court has effectively dealt a financial blow to its domestic coal business. Some of the biggest companies operating in mining, steel, cement and power industries now face risks of losing coal assets and financial institutions are worried about the huge loans provided to these sectors on assumption of coal supplies to their projects.

Majors, such as Hindalco Industries, Tata Power, Bhushan Steel, Essar Power, Reliance Power, Lanco, GVK and ArcelorMittal, operating across pig iron, power, coal-to-liquid, cement and steel, have all lost coal blocks with their projects linked to these coal assets in uncertainty and risk.

Jindal Steel and Power Ltd. (JSPL) was another private sector major at risk. Its Utkal coal block with a reserve of about 148 million mt was linked to its steel project in the eastern Indian state of Orissa. Similarly, its coal block at Talcher also in the same region with reserves of 150 million mt had been allocated to the company for a coal-to-liquid project has been taken back, too.

In a 2012 report, national auditor, comptroller and auditor general (CAG) said that allocation of coal blocks to large and small companies without auction had resulted in a $31 billion loss to the national exchequer.

In a corollary to the main ruling, the Supreme Court disallowed commercial mining and use of surplus coal for all-purpose other than captive use by ultra-mega power plants (UMPPs). This would impact other legal challenges pending involving Tata Power, Reliance Power and the government.

In 2008, the then-government allowed Reliance Power to use surplus coal from its 4,000-MW Sasan UMPP for the company’s 3,980-MW Chitrangi UMPP, which was challenged by Tata Power claiming diversion of coal was not in public interest. The case is currently pending before the Supreme Court.

In yet another segment of the ruling, the Supreme Court said that mining entities controlled by provincial level governments would not undertake commercial mining nor enter into joint ventures for mining, effectively clamping down on several joint ventures of provincial government and mine, developer operators (MDOs).

The government had allocated coal blocks to 29 states or companies controlled by them and several of them had appointed MDOs to undertake mining linked to supply dry fuel to steel and power projects in the region.

The Supreme Court verdict has also cast a cloud on already stressed bank credit to the steel and power sector since their projected risk will become unviable if coal assets were taken away. According to the Reserve Bank of India (RBI), gross bank credit to power and steel industries as on June 2014 stood at $84 billion and $44 billion, respectively.

The level of stress on bank credit to these sectors was evident from the fact that 52 loan accounts of companies in steel sector and 16 loan accounts in power sector had to be restructured by the bank in June 2014 to prevent these loan portfolios from becoming non-performing assets (NPAs) on the books of the lenders.

In late October, the government started initiating legislative changes that would enable it to put all the blocks up for fresh allocation through electronic auctions. As the first step, the government initiated laws to acquire back all land bought by companies whose coal blocks are canceled by the court.

The new law was imperative for the government to plug the loophole since the Supreme Court order of September 24 declared that all 214 coal blocks allotted to various companies and investors since 1993 were illegal and had to be taken back by the government.

But the same order did not mention anything about the land above the coal reserves, which companies had bought from various private owners to implement mining projects. In absence of the title for such land vested with the government, the latter would not be able to hold fresh auction of the 214 coal blocks as directed by the courts.

However, not all felt the auction was the panacea for all that ailed the industry. “Auction would change the concept of allocation of scarce resources followed so far and competitive bidding through auction would lead to wastage of valuable resource and discourage risk capital in minerals,” said R. K. Sharma, secretary general, Federation of Indian Mineral Industries (FIMI).

Others have been guarded in their reaction to fresh auction of the blocks.

“Fresh auction is an important decision and highlights the government’s seriousness in reforming the coal sector. But it is also necessary that the route followed must provide a level playing field between both government and private sectors in terms of terms and pricing,” said Sidharth Birla, president, Federation of Indian Chambers of Commerce and Industry (FICCI).

The trade unions operating in the coal sector were already up in arms against the government. “Fresh auctions was a backdoor entry for taking over the entire coal sector by private companies,” said Gurudas Dasgupta, general secretary, All India Trade Union Congress (AITUC).

“There are enabling clauses in the laws introduced by the government, which gives rise to apprehensions of sweeping privatization of national resources. This is not in national interest and it could jeopardize CIL,” he added.

Truck-shovel mining is prominent in India, with mainly hydraulic excavators and 100- to 190-ton class haul trucks.
Truck-shovel mining is prominent in India, with mainly hydraulic excavators and 100- to 190-ton class haul trucks.

 

THE PRODUCTION GRIDLOCK
“Coal production over the last four years has hardly been growing at 1%-1.5%. For last year, I see production going up by 6%. I have an ambitious target of nearly 1 billion mt over the next four years,” said Coal Minister Goyal.

Ambitious or bravado? The jury is still out. Nonetheless, past performance of the Indian coal industry definitely remains an indication of the future. Since the problems of the industry stretches far beyond mere allocations and auctions, which were issues engaging the government the most.

The issue, which does not grab the headlines, is simply that India was fast running out of cheap options of open-cast mining. Pressures of population of land, resultant protests against land acquisition by locals, high cost of rehabilitation and resettlement of displaced people were reducing options of government miners to rapidly plan and implement projects to increase production.

Underground coal mining takes time to develop. The proportion of coal production from underground and open-cast mines in India was diametrically opposite to global trends. Of total coal production last year, only 51 million mt was accounted by underground mines. During the past three years, the share of underground coal to total production has fallen steadily from 18.5% to 13.39% to 9%.

The substantial fall in production from underground mines were largely owing to CIL. They have been slow to develop underground mines since the geology of the reserves did not permit an underground mine capacity of more than 2 million mtpy. The operational costs for such small capacity mines were not economically feasible for the miner.

With the average Indian underground mine taking six years of planning, the country lost valuable time to reverse the trend, more so since most of the existing underground mines were loss-making with average costs far higher than open-cast mining.

In a communication to the Coal Ministry in September, CIL said that cost of production from operational underground mines had gone up by an average $16 per mt over the past year while production was falling at rate of 1 million mt per year.

The miner said that cost of production of underground mines was about $54 per ton, and to ensure a minimum rate of return of 12%, the government would have to permit the miner to have differential pricing for coal mined from underground and open-cast methods.

CIL, along with SCCL, last year sought differential rate of royalty payments for underground and open cast mines along with a “tax holiday” as incentive to invest in underground mines, but unfortunately the government has not responded.

Of the 467 mines operated by CIL, 270 were underground, 160 open cast and 30 mixed mines. For the past several years, CIL had been attempting to revive 18 abandoned underground mines through global mine developers and operators, but very few global miners have showed interests in such Indian projects.

India depends on coal-fired power for electricity, and the logistics of moving coal from the pits and ports to the power plants is becoming more complex.
India depends on coal-fired power for electricity, and the logistics of moving coal from the pits and ports to the power plants is becoming more complex.

 

LACKING IN LOGISTICS
Faced with creaking logistics, miners can do little but throw up their hands. And, with transportation controlled by the government, they can do very little.

“CIL can increase capacity by 300 million mt, but there is no infrastructure available for evacuation of additional production, and hence our production can rise by 30 million mt at best over the next few years,” said a CIL official.

This related to the Tor-Shivpur-Kathotia in the North Karanpur coal block in the eastern Indian state of Jharkhand, Bhupdeopur-Korichhaapar in Mand Raigadh mines in central state of Chhattisgarh, and Barpali-Jharsuguda in IB Valley, Orissa, in eastern India where various mine projects were in various stages of implementation but did not have any railway corridor to transport production to user industries.

According to the CIL official, $1.2 billion investments for construction of railway links across coal-bearing provinces in eastern and central India were held up by issues ranging from land acquisition, environmental and forest clearances, rehabilitation of local population and insurgency of left-wing extremists.

Even the existing freight carrying capacity of the government-owned and operated Indian Railways was inadequate to handle any incremental production.

Of its total production, CIL supplied 304 million mt of coal to thermal power plants across the country. With new power plants with capacity of about 78,000 MW slated to go into production, an additional 308 million tons of coal would be required, entailing transportation of 612 million tons of coal.

About 90% of total coal mined was transported by Indian Railways and accounted for 42% of its total $13 billion revenues. To handle the incremental demand for coal, Indian Railways freight carrying capacity would need to increase by 17% while its growth in total freight capacity has fallen from 6.5% in 2009-2010 to 4% in 2013-2014.
At the same time, 12 major ports equipped to handle coal have an aggregate capacity of 67 million mt and are projected to increase to 177 million mt by 2016-2017, but by then coal imports are forecast to increase to 265 million mt.

“The new Indian government, soon after taking charge earlier this year, has appointed an advisory committee to look into the growth issues of the coal and power sector. This committee will take a holistic view and various linkages including bottlenecks in transportation capacity building,” a coal ministry official said.

But considering that it takes no less than 12 years to get a coal mine operational in the country, the jury is still out on the future trajectory of the Indian coal sector.


The Indian Story So Far — A Messy Affair
  • June 1993: Coal Mines Nationalization Amendment Act passed to permit captive coal mining.
  • 1993-2009: Federal government allocates 214 coal blocks to private and government companies for captive use.
  • August 17, 2012: National auditors, comptroller and auditor general (CAG) declare that government gave undue gains to companies by not auctioning 57 coal blocks allocated between 2006-2011.
  • August 27, 2012: Prime minister declared in Parliament that CAG’s assessment of a $33 billion loss to exchequer due not no adopting auction process was not justified.
  • September 2012: Federal investigators, Central Bureau of Investigations (CBI) commences questioning and investigations into alleged coal scam conducting raids and filing police complaints.
  • June 2013: Official criminal complaint lodged against Naveen Jindal, chairman, Jindal Steel and Power Ltd. and former coal minister, Dasari Narayan Rao.
  • October 2013: Criminal complaint lodged against Kumar Mangalam Birla, leading Indian industrialist and former secretary to Coal Ministry, P.C. Parikh.
  • August 2014: Supreme Court rules allocations made between 1993-2010 as illegal.
  • September 2014: Supreme Court cancels all 214 block allocations and directs Coal India Ltd. to take over the mines.
  • October 2014: Government announces new laws to result issues relating to Supreme Court order.