Relaxing norms for private coal mining unlikely to attract investment

Although commercial coal miners could well improve the productivity of the mines, the cost of coal extracted will still rise.
The government decision to open up coal for commercial mining is an excellent decision — only, it has just missed the bus. It has finally set up a market for the fuel when global mining investors are unlikely to underwrite coal mining. India, meanwhile, is delaying the creation of a market for natural gas, which is the obvious switchover fuel on the road to renewable energy. The big news flow from the global energy economy is about investments in gas and in hydrogen but we are missing those.

These are the reasons why India’s plan to allow commercial coal mining has not created any major ripples. The government last week allowed any India-registered company to bid and develop coal blocks. The Minerals Law (Amendment) Ordinance 2020 amends three Acts; Mines and Minerals (Development and Regulation) Act, 1957, the Coal Mines (Special Provisions) or CMSP Act, 2015, and Mines and Minerals Development Act, 1957. The CMSP Act will also allow any company to sell the coal it produces as a commercial product in the market rather than to specified end-users.

The cabinet decision wipes off all the impact of the Coal Mines (Nationalisation) Act of 1972. In the 47 years since then, there has been abortive attempts to overturn this restrictive regime. The most famous of those was the one by Narasimha Rao government which instead settled for captive use-based coal mining to begin India’s coal rush. The walk back has finally happened.

The economy has imported 235.24 million tonnes of coal in FY19, up 24 per cent in two years. Domestic coal production in FY20 will most certainly fall short of the level of 730.35 million tonnes recorded in FY19 (it is 498.5 million tonnes in nine months till December). Despite India’s growth slowdown, domestic coal supply is short. It still has to meet about 60 per cent of India’s electricity demand through this decade. 

This means India will mine even more coal in this decade. The estimates for 2030 paint a generous range of 1.3 to 1.9 billion tonnes. The problem is this cannot be met solely through current production lines. CIL’s production plans show it will mine about 925 million tonnes by then. Singareni Collieries Company Limited (SCCL) and the captive miners can produce another 500 million tonnes. Import of coking coal to feed steel plants will continue since India’s reserves are almost exhausted. 

So even though India could do with more coal mining, the room for commercial coal miners is restricted —  unless they take over CIL mines or those of captive coal miners. Both are possible. The cost of mining coal for CIL has risen sharply. Its two largest subsidiaries, Mahanadi Coalfields and South Eastern Coalfields, are producing less coal for each tonne of waste they dig up. “With increasing cost of production and lowering of grade, the competitiveness of coal would get increasingly constrained. This does not take into account the increase in capital cost due to revised land acquisition policy and overall inflation. Compared to alternative sources, particularly solar, coal could be increasingly disadvantaged,” CIL’s Coal Vision document notes.

Although commercial coal miners could well improve the productivity of the mines, the cost of coal extracted will still rise. Due to generous government policies over decades and the sunk depreciation costs, CIL and SCCL are able to mine coal at an average cost of Rs 1,000 per tonne. New companies to generate any level of efficiency will have to make capital investments and this would raise the cost of coal. They will also need to raise costs because the auction formula for coal mines —the ascending forward method —means there shall be a floor price and companies will have to bid above this price. It shoots up the price of the coal block, which is why most coal blocks beyond the first 75 that were auctioned have not got any response. So the best option for commercial coal miners will be to buy the existing stock of mines from the original owners. 

Except, even for this route there are few takers globally. Of the top ten largest coal miners by market cap, three are Chinese companies — China Shenhua Energy Company, Shaanxi Coal and China Coal Energy. The Indian government will be leery about letting them in. Among the rest, Wesfarmers of Australia exited coal mining in 2018. The coal business of Peabody, BHP Group and others is increasingly looking fraught. 

Few banks abroad are willing to lend money to mine new coal projects. The league of insurance companies willing to underwrite fresh projects is also thinning sharply. The Adani group, for instance, had to use its own money to finance the Carmichael mines in Australia and the insurance cover is still being negotiated, thanks to pressure from environmental groups. CIL and even private miners had the luxury of Indian banks and insurance companies to finance them. Where will the miners abroad get the financial space?

Among the rare ones that could take the plunge is Vedanta. Company chairman Anil Agarwal has often chafed at the slow pace at which India has opened up its mining sector. But when bidders are so few, the government runs the risk of having to offer sweeteners, which is a dangerous path to follow — after all, it created the coal scam in the early 2000s. 

Given the financial risks of such a policy, the Union cabinet would have done better to have take a more sympathetic view of expansion of natural gas business in India. We are still debating the details of an Indian spot market for natural gas, which could soften the impact of high costs of imported gas, though the benefits are clear. The International Energy Agency correctly says India’s natural gas pricing policy has reduced incentives for producers to raise supplies. Linking it to goods and services tax en route to setting up a national-level market helps India’s quest to make its climate bill lower. India’s gas market can serve neighbours in South Asia too all of whom have massive demands for energy for their rising populations. Most important, a liquid market for natural gas will keep prices under check, saving India’s forex reserves and building up energy security.  

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