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Coal’s Role Crucial... Could Change India’s Economic destiny

Monday, March 18, 2013

India has some of the largest coal reserves in the world (approx. 267 billion tonnes). Yet we import coal and are struggling… But the Government now has plans to enhance coal production. If they pull it off, the initiative has the potential to change India’s economic destiny, finds Manik Kumar Malakar

Coal is the new black gold in today’s India. In severe shortage, this rock is abundant in the country and has the potential to immensely benefit India’s economy, if produced in good quantities. India’s total coal production stood at 559 million tonnes (mt) in 2011-12, but much short of the demand at 696mt. And therein lies the rub. The government has plans to boost coal production in the XII Five Year Plan, a move that experts greet with cautious enthusiasm.
But if the government gives some support and ensures some discipline in the sector, then a lot of companies and sectors as also the nation as a while is set to benefit.  “The target is extremely ambitious,” says Sudip Bandyopadhyay MD & CEO Destimoney Securities. He was speaking with reference to The XII Five Year Plan that plans for an investment of Rs 25,400 crore to enhance coal production. Thus, according to governmental projections coal production should be at 615 million tonnes by 2016-17. “However, this is not unachievable if the private sector is not actively encouraged and involved in the process of coal production,” is Bandyopadhyay’s caveat.

Kishor P Ostwal, CMD, CNI Research too feels that if the government does find the funds for this plan, then it would be viable.  And let us not forget that even today it is infra or lack thereof that is a constraint. “It is achievable, if we provide advance infrastructure and the sound availability of rail tracks for the transportation of coal from production sites. Such a move will enhance production automatically,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. The availability of rail tracks is one of the key problems to enhance coal production.

So we switch over to the Government of India. The majority of coal production in India today is through the government owned company Coal India Limited (CIL). “It is not possible for Coal India to alone take up this challenge,” says Bandyopadhyay. Thus, private participation in coal production subject to necessary caveats is needed. “This needs to be facilitated through an appropriate legislation at the earliest,” he continues.

“I don’t think that the government needs any law to ramp up the production at targeted levels,” says Dubey. However, as he stresses rail transportation and hurdles in environmental issue need to be sorted out so that production can be enhanced.

And with coal enhancement we are not just looking at the coal and related industries like power and logistics, but also other sectors like banking. “The Indian Banking System shows approximately 2% NPA (Non Performing Assets) but in reality the NPA is as high as 13 to 15%,” says Ostwal. This could be a trigger for collapse of the banking system. “This is purely because of lending to power projects which have not gone on stream,” Ostwal cautions.

So the queries that now occur would be how would coal benefit the country, her economy, sectors et al? “Yes, absolutely, why not,” says Dubey. Fuel supply is one of the biggest issues to power and other manufacturing companies. Due to shortage of power other industries also get impacted including financial companies like banks. “So, I think once enhancement will happen it will short out many problems,” he continues.

“In our view, it is a conservative target given by government. If a comprehensive approach to policy making is done towards it as an Industry, then coal production should surely grow at CAGR (compounded Annual Growth Rate) of 7 to 8 percentage points,” says Anil Bhattar, Co-Founder and Chief Operating Officer, Radisson Consulting.

Incidentally, many sectors and companies would benefit from any coal enhancement targets.  As per consumption patterns today; the thermal power sector accounts for nearly 70% of coal consumption followed by steel and cement at 7% and 3-4% respectively and the rest by other industries.

“Therefore any improvement in coal supply should benefit power companies which currently are operating at 60% Plant Load Factor (PLF) level and have only one week of coal reserve,” says Bhattar. And considering that we import substantial amounts of coal, what if domestic coal targets are enhanced? “Port companies will not be impacted as the demand supply gap is still so wide that even the increase in domestic supply would meet part demand and CIL thrust on import of coal assets through acquisition,” Bhattar continues.

“I would be betting on NTPC, NHPC, PFC, REL INFRA, Tata Power as these large companies which have capability to deliver,” says Ostwal. “However, we will bet on power and power utility companies,” says Dubey.

“I think every sector of the economy will generally benefit, as fuel supply is the biggest issue for the manufacturing sector,” says Dubey. “It is positive step forward which will have positive impact on GDP, CAD and economy as a whole but in a major economy like India, the onus of exploiting such vast resources cannot be on one government organization,” says Bhattar. “A virtuous economic cycle can get kick started if coal production is enhanced,” says Bandyopadhyay.

CIL is on the prowl
Minister of State for Coal, Pratik Prakashbapu Patil in a written reply in Lok Sabha last week said that CIL has acquired prospecting license for two coal blocks in Mozambique through a wholly owned subsidiary Coal India Africana Limitada (CIAL) formed in Mozambique. A multi-disciplinary team of four senior executives have been posted in Mozambique since February 2012 and they have opened up office of Coal India Africana Limitada (CIAL) in Tete since March 2012. Upon obtaining environmental clearance for exploration activities, drilling activities have been started since November 2012 and about 3100 m drilling has been carried out till date. The geological mapping works of the coal concession area and majority of survey work have also been completed.
CIL has adopted provisions of Rs. 35,000 crores for acquisition and development of coal assets abroad to be spent in 5 years during the XII Plan period.

Coal Stats
CIL has produced 435.8 MT coal for FY 11-12 which accounts for 80% of production of coal in India.  Which bring full year production for India to 544.75 MT, If we consider this as base and consider a growth, target of FY 16-17 of 615 MT; it is 3% growth per annum which is very much achievable. Government has also initiated some important measures towards this and one of them is introduction of Mines and Minerals (Development and Regulation) Bill (MMDR Bill), 2011. This bill guarantees assured annuity to the local population either through a 26% share of profits (post tax paid) earned by the miner in case of coal or an amount equal to mineral royalty in case of non-coal minerals, resettlement and rehabilitation of the local population through employment and skill enhancement as outlined by the concerned state government. Some of the other key reform measures are - Auction of coal licenses/non-coal minerals via competitive bids, drafting the national sustainable development framework for mining areas, setting up of coal regulatory authority/national mining regulatory authority etc. These reforms are positive signals for the future of Mining Sector in terms of leading to robust licensing process to boost the investor confidence and auctioning of coal blocks only after exploration and preparation of the geological report will provide better clarity of asset base.
As reported recently that Coal India has already created a war chest of Rs 34,000 crore for acquisition of coal assets abroad during this period. Of this, Rs. 4,484.62 crore will be invested in existing mines and another Rs. 11,385.05 crore in ongoing projects.

Steps To Enhance Coal Production

  • Address operational issues such as key administrative problems of multiple registrations and compliances reporting - introducing single window clearances will ensure timely regulatory clearances for the mining projects etc.
  • Improve mining performances through improvements in innovation and technology, infrastructural facilities.
  • Provide sustainable development of community etc.
  • Increase investor confidence to invest in mining projects, addressing the needs of local community in the immediate term basis.

Factors that could affect coal enhancement production
“I don’t think there is any global hurdle as far as domestic production is concerned, I believe environment clearance and availability of railway rack for transportation are big risk and might impact negatively,”
—Uday Narayan Dubey, 
R K Global

“The execution of policy is a big challenge... The recent coal scam has hit hard the country and genuine strong mining and metal companies were deprived of the open policy coal blocs.”
—Kishor P Ostwal, 
CNI Research 

“The timely acquisitions of coal assets  abroad, alignment of domestic and import prices, investor’s confidence in investing in mining project, regulatory reforms are some of the key factors.”
—Anil Bhattar,
Radisson Consulting

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