by ajoy k. das
With 447 fully explored coal blocks in its portfolio, 16 new ones allocated and 170 billion metric tons (mt) of reverses available, state-run miner, Coal India Ltd. (CIL) is ready to stave off any competition from private miners and limit the latter’s production to just import substitutions.
“The company has sufficient blocks with abundant resource capacity to continue as a commercially viable entity in the competition era and there is no concern,” CIL Chairman Pramod Agarwal said. “Key issues that will help improve and stay ahead of the competition include uniform quality of coal, cost efficiencies in production and reliable the timely deliveries. Introduction of a higher degree of mechanized mining and increase supplies are other focus points for us.”
Toward this end, the state miner will spend an estimated $1.28 billion in procuring wagons and equipment. Capital expenditures have been earmarked to the tune of $2.43 billion to switch to mechanized coal transportation through conveyor belts from mines to railways siding replacing existing road transportation.
This amount excludes the direct government funding of $6.74 billion for the development of coal handling plants at ports and augment transportation chain through waterways bringing road transportation to nil over the next five to six years, a CIL official said.
Having amended mining legislations early this year, permitting entry of domestic and private miners into commercial coal production thereby ending nationalization of the coal industry, the Indian government last month commenced the auction process of allocating 41 coal blocks to private investors.
The 41 coal blocks were expected to net investments to the tune of $4.46 billion, with expected peak production of 225 million mtpy or 15% of the country’s total current production by 2025-2026.
However, a CIL official said, “Commercial coal mining will complement our efforts in increasing coal output, but it will not be viewed as competition for CIL as it does not unsettle us.”
Even in the medium term, private commercial coal miners account for an estimated 225 million mtpy, which was far less than the 602 million mtpy produced by CIL. In fact, even at a peak capacity output of 225 million mt, private miners at best could be expected to account for import substitution for India’s annual imported coal of just around 235 million mt.
Furthermore, CIL’s competitive advantage even in an open competition with private miners would be its sheer volume of production compared to the latter. Higher volumes offer CIL the leverage to enter into long-term supply agreements with bulk consumers like thermal power companies. For example, it supplies an estimated 488 million mt of dry fuel every year to thermal power plants enjoying pricing power in negotiated supply agreements. This volume itself would continue to be much larger than the combined production of all private miners in the coming years.
A former chief executive officer of CIL pointed out that the possible impact of opening up domestic coal mining to foreign and domestic investors was that latter would take years to achieve economies of scale to compete with CIL in terms of volumes offered to consumers through long-term contracts and achieve any significant market share.
Secondly, the state-run miner was allocated new coal blocks through preferential allotment while foreign miners would need to bid at the auction and any successful bidder would need to amortize the large upfront payments at the auction with comparatively limited volume production, the CIL veteran added.