Lack of Policy Stunts Coal Supply Growth in India

BRISBANE, Australia - Aug. 5, 2013 - PRLog -- To mitigate the fuel shortage in the country the Indian government initially amended the Coal (Nationalisation) Act in 1993 and began awarding coal blocks to privately-owned enterprises for their captive use. However, the right to market the surplus coal was still vested with Coal India Limited (CIL).

Since that policy change, the government has allocated 196 coal blocks with total reserves of about 44bt to private players. Of these, so far, only 30 mine operators have started production, while the total quantity of coal produced through this route currently stands at close to 40mtpa.

The move, which was initiated by the Planning Commission, was being pursued to help increase coal production and to get the private sector, particularly foreign companies, involved in mining. However, the production from captive coal blocks, long regarded as the best supplement to CIL’s output, has failed to increase domestic production substantially.

For instance, the biggest contract mine, NTPC’s Pakri Barwadih mine in Hazaribag in Jharkhand, is yet to come into operation despite several assurances that the company would start producing coal soon. Thiess India secured a $5.5b, 27 year deal to produce 15mtpa in 2010.  The mine is designed to replace material that is currently sourced from the import market.

“Displaced people protested strongly and demanded more compensation for losing their cultivable land under the R&R [resettlement and rehabilitation] policy of the NTPC,” a media report quoting a company source suggested recently.

There is consensus among analysts and industry insiders that the country has to go a long way before it can effectively implement the changes in the mining policies to fetch the desired effects.

“First of all there has to be a comprehensive land acquisition policy in place, which every state can adopt easily. Presently the policy varies from state to state as it is a state subject,” said Rakesh Jain, associate director at Feedback Infra, a leading consulting firm on energy and infrastructure.

Mr Jain believes that regulatory uncertainties coupled with land acquisition issues have been the major impediment in implementing the renewed mining policy effectively across the country.

However, more recently, as a way of mitigating the growing gap between demand and domestic supply, there was a wave of international coal mine acquisitions. The deals were varied, from the purchase of a stake to the development of new blocks, including a bruising environmental battle in Australia that delayed production five years.

Several companies, including Tata, Adani, GMR, Jindal Steel and Power, Aditya Birla and Gujarat NRE have invested approximately $40b acquiring assets in Indonesia, Australia and South Africa. Many of these companies acquired the assets with the intent of bringing the coal to markets in India.

However, international acquisitions haven’t translated fully into secure supplies or stable prices back home. Tata and Reliance, for instance, are both in a complicated process of having to renegotiate the power purchase agreements of their ultra-mega power plants as a result of changes in Indonesian law on exports that pushed up prices.

“Today’s market is different from when this move started years ago. Most of the parameters under which companies decided to pump in money have gone for a sea change now. Much of the expectations remained only expectations, for many of us,” an executive of an Indian company located in Jakarta had recently told Indian Coal Report.

His company acquired a coalfield in Indonesia several years ago and was expected to begin production by 2011. However, production is yet to start and the executive now expects that it will be another year before it can begin.

“The experience of the past has dissuaded many of them [Indian mine investors] from making further investments in the sector. Most of us have not been able to recover even the cost. So, new players are most unlikely to make any such investment easily in the near future,” the executive said adding that there are bigger risks in dealing with foreign governments as they can change their policies to suit their emerging requirements at any time.

Of late, on the domestic front, a gradual shift in government policy to accommodate the concerns of private players was evident when the government recently said that it would allow captive miners to sell their surplus coal in the market, even though the initiative would be without any fundamental change in the Coal Nationalisation Act.

Under this proposal the mine operator can sell the surplus coal from captive mines through CIL in E-auctions where the margins can be shared between the mine operator and CIL, the government said recently. The government expects that the move will bring in more private partners.

However, expert opinion on dismantling the present structure of CIL to separate smaller entities to boost production remained mixed.

While the former CIL Chairman N. C. Jha said that “dissolving Coal India [CIL] means you are shifting the structure of Coal India from Coal India to the Ministry of Coal. For planning, monitoring and coordination, for all these functions, a structure like Coal India will have to be in existence somewhere,” a senior consultant with ICF International, Amit Sharma said that “if it [restructuring of CIL into separate companies] happens, it can really be a good thing to solve many of the issues the coal market faces in the country. Essentially it will help the market become competitive”.

In its 12th planning document the commission had suggested converting CIL subsidiaries into separate public sector companies to develop their own strategies of coal development.

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