CIL has to shape up: Privatising coal mining to create window for investors

The Cabinet Committee on Economic Affairs (CCEA) took a brave decision last week when it cleared private participation in coal mining via an auction methodology. This is a big step forward, given the scandals during the UPA regime when captive coal blocks were allotted to various companies. The CCEA removed restrictions wherein only power and metals companies could bid for blocks. 

This is part of a logical progression. The Coal Mines Special Provision Act 2015 opened up commercial coal mining in theory to private entities. In 2016, coal blocks were awarded to state-controlled mining corporations for commercial mining. 

Coal India (CIL) accounts for over 80 per cent of total coal output. Assuming this step does turn into meaningful action on the ground, it could affect the market capitalisation of CIL negatively while making a positive difference to downstream user industries like thermal power and steel.   

CIL had a mega initial public offer back in October 2010, raising Rs 155 billion at Rs 245 a share. The Government of India holds 78.5 per cent stake post-issue. The current price is about Rs 310. That's a paltry return over seven years.  If CIL finds it hard to stay competitive, investors may suffer capital losses as the monopoly erodes. But private mining may mean higher efficiencies for power producers and cheaper steel production. 

The private sector can induct new technology for highly manpower-efficient operations, including contract mining via specialists. CIL, on the other hand, has massive excess manpower and uses old technology. So it would find a competitive environment difficult. 

Transparency, in the auction’s terms and conditions, will be vital. The auction revenue is slated to go to the states where coal blocks are located.  Bidders will offer a price (Rs / tonne) payable to the state. There would be no restrictions on sale, or end-use. 

Mining operations have long timelines. Even after auctions, it may take years to physically produce coal from a given block. There will be a host of environmental issues and challenges like local protests against mining operations. Once coal is extracted, it also has to be delivered and that means transport linkages and logistics. 

On the plus side, there is surplus demand from power and steel. Power is still adding thermal capacity.  The power sector demand is expected to hit 900 million tonnes a year by 2020 and 1,300 million tonnes a year by 2030 at the very least.  

CIL produced 554 million tonnes in 2016-17. It has a target of 600 million tonnes this year (2017-18) and 630 MT in 2018-19. It hopes to produce 1,000 MT by 2019-20. CIL is likely to miss the 2017-18 target since its production of 385 MT (April-December 2017) was running below its target of 406 MT for the period. 

Coal prices vary a lot, depending on calorific content and impurities. CIL sells at differential tariffs that favour power producers over metals producers. The highest grades go for above Rs 3,450 a tonne while the lowest grades go for as low as Rs 470-570. Coking coal used in steel production is more expensive. 

CIL allocated long-term linkages of 27 million tonnes of coal to 10 private power plants in an auction in September 2017. Bidders reduced power tariffs by about four paise in return for assured coal supplies of over 27 million tonnes per annum for 25 years at fixed prices which were considerably cheaper than the going e-auction prices. If private commercial miners (or power producers with captive blocks) do slice coal costs, power tariffs should fall considerably and plant load factors could also rise. 

However, there's climate change and environmental issues to contend with. In the last five years, global demand has fallen, as China cut back coal use due to those factors. International prices have swung between $45 a tonne and $106 a tonne. High-grade coking coal has moved between $140 and $300 levels.

India is out of step with the global trends in its reliance on thermal coal and there will be continuous pressure, internationally and from civil society, to cut back on coal usage. If there's any sort of breakthrough in cleaner energy technology, thermal will be left behind. But all those worries notwithstanding, privatising coal mining could create a decade-long window for investors. It's also a warning to CIL to shape up or lose its dominance.

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