Coal shortage for Power Generation in India - My comments on Forum - Powerline magazine

Q. Do you think the coal supply situation could potentially decelerate the growth of the power sector, given the rising coal prices on one hand and the anticipated shortage in the medium to long term?


It is likely that the demand for coal for power generation will outstrip supply by quite a margin. This will result in lower than expected growth in the power sector. The growth in domestic supplies was subdued this year (2010-11), and this weighed down the index of industrial production. The supply from imported sources is expensive. The projected gap in coal demand and supply in India is substantial when compared to the size of the internationally traded coal markets, and this is likely to ensure that the global pricing will remain strong. Coal supplies from Australia and South Africa have been growing at a relatively slower pace. Also, the brisk growth of Indonesian exports over the past five years is unlikely to continue. The fact that coal mining projects tend to have a longer gestation period, and that newer projects in these countries will increasingly come up in areas that will need investments in logistics and support infrastructure, raises questions about the feasibility of importing coal. Domestic projects have, on the other hand, run into regulatory and policy uncertainties, apart from the normal procedural issues that exist. The declaration of “go and no-go” zones has impacted several new mining projects including the proposed ultra mega power projects (UMPPs) in Orissa and Chhattisgarh. Uncertainties with regard to the mode of competitive bidding for new blocks have stalled new captive coal block allocation. They have also impacted domestic supplies and will surely impact generation capacity addition.



Q. What strategies in terms of policy and action should be put in place immediately to counter this issue?

India needs to create an institutional framework to support faster implementation of the sanctioned projects. Single window clearance through coordination of the central and state agencies is needed, which, however, need not mean any compromise on the quality of approval mechanisms. The investment environment needs to be enhanced, and this requires stability in fiscal and policy regimes. New policies, fiscal, environmental, technological or otherwise, should not be allowed to impact the existing or sanctioned projects as the mining industry, which otherwise has longer payback period as compared to other industries, could lose out to capital inflows elsewhere. With regard to non-serious players that have not been able to develop their coal blocks, the government needs to be objective in its assessment and decisive in the cancellation of allocation.

The Case 2 mode for competitive bidding of UMPPs has proved successful, and could be considered for deciding the bidding mode for coal blocks. Upfront payment or production-linked payment or any combination thereof may lead to an increase in tariffs. Coal blocks packaged with preparatory works bid under the Case 2 type may be appropriate for the power generation sector. Investments also need to promoted in creating the backbone infrastructure for coal mines in India and for supporting imports. The wish list may seem long but these are a must if the nation desires to avoid severe power shortages.

Underground coal mining in India – Need to enhance capacity - My article in the Mining India magazine, May 2011 issue

Underground coal mining production has been stagnating and has been hovering around 45 million tonnes per annum. The pace of growth required in coal production in view of the un-satiated demand has kept the focus on surface mining, which has also witnessed greater production efficiencies due to enhanced level of mechanization. But the pace of growth in production from surface mines does not seem sustainable when the demand is likely to cross 2 billion tonnes per annum by 2030. This primarily due to larger land required and greater damage caused to the environment, bust also due to the fact that stripping ratios will rise continuously along with the need to mine deeper coal seams which in some ways will close on the economic viability of surface mining versus the underground mining methods.


The need for underground coal mining

Typically surface mines need land for mining, waste dumps, and for facilities to transport both coal and dumps. There have been efforts to reduce the land requirements to handle overburden through better management of dumps and continuous reclamation, but the surface mining method cannot reduce land requirement to a large extent due to the very method of exposing the entire coal seam to mine and win coal. Land has become key issue in project development in India with land acquisition, rehabilitation and resettlement getting problematic and controversial. Large projects have been delayed and some even shelved, not just mining but manufacturing and services industry projects in equal measures, due to these issues. With growing economic divide in India, acquiring land from farmers, tribal societies and rural holders is likely to increasingly difficult. This will favor a technology that requires land in lower measures.

Environmental concerns are also on the rise, including the vanishing forest covers. These also emanate from the climate change concerns and the global efforts to contain them through a systematic approach to reduce emissions. Through surface mining methods, methane in the coal seams is liberated directly into the environment, while methane is known to have substantial carbon footprint. Underground mining methods may have an option of capturing methane through coal bed methane technology preceding coal mining or through coal mine methane capture from exhaust ventilation. These while supporting efforts in reduction of emissions will also help optimal economic realization from the coal resources.

From the pure economic perspective, the increasing depth of coal seams and the rising stripping ratios may tilt the balance in favor of underground mining. Although the depths of coal seams mined through surface mines have been increasing with the rise in prices of coal, the trend may soon be arrested due to enormous amount of waste handling required to win coal. Higher stripping ratio means higher cost of winning coal and also higher cost of waste management and land reclamation. Mine closures in such cases are also likely to be expensive.

The growth inhibitors

The growth inhibitors for underground coal mining have been high cost of mining, technological problems, safety and subsidence issues. Cost of mining has been high due to higher capital costs. Cost of incline-driving or shaft sinking is high and it takes longer time for construction. Construction of drive ways and haulage arrangements tend to be complex, which are compounded by the requirement of ventilation. The operating costs also tend be higher due to lower labor productivity, due to work environment being tougher – the temperature, humidity, gas concentration in the air and other factors – make it difficult to work efficiently for the shifts. These can be improved through higher levels of mechanization, which in turn, further raise the capital costs.

But the higher capital costs alone have not been the reasons for lower levels of mechanization in underground coal mines in India. Technologies typically applied in India are bord and pillar, with or without de-pillaring; and longwall mining. There are around 300 underground mines of Coal India Limited, about 64% of which are manual or semi-mechanized bord and pillar (B&P) workings. Of the rest 33% are mechanized B&P and just about 6 mines with powered supported longwall mines and 2 mines with continuous miners. There exists scope of mechanization and performance improvement in all these underground mines. In case of Coal India Limited, for 2009-10 the output per man-shift (OMS), a generally accepted parameter for productivity, for underground mines was 0.78 tonnes while it was 9.51 tonnes for surface mines. The performance of underground mines of Singareni Collieries Company Limited was relatively better with an OMS of 1.08.

The selection of technology and hence, the equipment for underground mining is key to the successful implementation. Longwall technology for coal promises high productivity and coal recovery (more than 75%) but the technology does not have a good record in India. Apart from lower than expected production and productivity, there have been failures at Charcha and Kotadih mines. Several factors have contributed to these, including geo-mining conditions, hard roof strata, compatibility with other equipment, lack of adequate maintenance systems and lack of trained staff. The technology has been quite successful in several countries, particularly so in China, where about 90% of the annual production of around 2 billion tonnes per annum comes from underground mines.

There are other underground mining methods for coal that are being planned for implementation. Shortwall mining, which is continuous mining system with movable support system used for pillar extraction, can used to increase coal recovery. Continuous miners and sometimes, road headers, may used for shortwall mining method, however, these methods have lower production capacities and productivity in comparison to longwall method.

The issues of safety and subsidence also are prominent in determination of application of underground mining methods. The safety performance of coal mining in India has been good and accidents of all types have shown marked improvements in the recent decade which looks better when compared with the high growth in production. But that said, it must be appreciated that the larger proportion of the increased production has come from surface mines. Safety in underground mines can be improved through better training and better leadership that focuses on safer workings and zero tolerance to safety compromises. Subsidence on the other hand will largely depend on appropriate application of caving versus sand stowing in underground operations.

Growth enablers

Typical enablers for greater application of underground coal mining methods are likely to be pricing, cost effectiveness and operational efficiencies. Cost effectiveness and operational efficiencies are inter-related. Greater operational efficiencies can easily result in cost reductions. However, a cost focused approach to mine planning, construction, development, and operations – drilling, blasting, haulage, ventilation and other activities of surveying, sampling and quality assurance – can reap in good results. The reasons for bleeding operations in most underground mines in India have been lack of cost focus. Some of these mines are being cross-subsidized by profitable surface mines and hence, the focus on cost reduction is missing.

The capital costs may have been higher also due to the approach to procurements, which seem to take a very traditional approach. Relationship building with suppliers and vendors at the corporate levels need to take center-stage. Although difficult to quantify, the role of corruption can also not be completely denied in such procurements. The contract management for construction projects also needs to be tightened to ensure time and cost adherence.

Operational costs can be reduced through careful examination of practices and can be kept benchmarked with the best in global context. The mines need to be encouraged to be individually viable projects and the mine management needs to be incentivized for the same. Some of these are happening but not at a pace that can make underground mining methods challenge the surface mining methods.

Technology adoption which has been the key reason for lower than expected results from underground coal mines in India needs careful examination. The geo-technical parameters in Indian coal mines are different from those in China, South Africa or USA, where these technologies may have produced spectacular results. Inappropriate application of technology not only makes capital cost excessive for the life of the project, but even after higher operational costs, the production remains lower than planned. Such decisions must be taken with longer term perspective. Collaboration with global equipment suppliers and mining companies can never be overstated. Off late, Coal India Limited has been inviting global majors for the same and Singareni Collieries Company Limited has been successful in seeking foreign collaboration for their underground mining projects. While the terms of such collaborations are worked out, the principals of the coal mines may like to take internationally accepted norms of association and risk sharing. These will make Indian coal resources amenable to profitable extraction through underground mining methods.

Pricing of coal has been a contentious issue in India. Even though the coal companies are empowered to take pricing decisions, the government share-holding impedes the same and sometimes these decisions are socio-political than being purely economic. Pricing of coal for underground mines may need to be revisited. Pooling of costs and prices makes the underground mines less aware of the cost implications and also the coal produced by them may not reflect the cost structures underneath. Cost plus or market driven pricing for such mines may be an idea whose time has come now. The end users of such coal may like to participate in project development plans and their effective implementations. Power projects or other users that intend to sell their final products into open markets may be allowed to forge partnerships with underground coal mining projects, which can make these projects economically viable. The government may also provide incentives for promoting underground coal mines through fiscal measures in view of the positive impact these projects can make on environment. Even the incremental saving on carbon footprint can be allowed to be monetized through clean development mechanism or otherwise.

Conclusion

The country seems headed towards higher production from underground coal mines but the timeframe in which these fructify needs to be carefully planned. The appropriate technology adoption, fiscal framework and cost efficiencies can help promote the technologies. These will help India tap its vast coal resources with restricted risks of social and environmental concerns.

Overseas Investment in Mining - Key Challenges - My article in the CII Journal of Manufacturing Excellence

Rush to Capture: Resources sector has been dominant in the mergers and acquisitions market even while the broader markets are emerging out of the recent financial crisis. The rush for mineral assets ranging from coal to iron ore and from copper to potash are largely being ascribed to economic growth expected in the emerging markets, more noticeably in China and India. Naturally, the Chinese and Indian companies have been in the race to grab global mineral resources, and the large Chinese acquisitions have alerted the mining companies and governments alike. Indian mining sector participants have been more cautious in their deal making and a significant proportion of the reported overseas acquisitions in mining sector have been done by the private sector, which is in contrast to Chinese largely state-owned enterprises led acquisitions. In a Deloitte-Mergermarket Group survey of Chinese mining sector conducted in August 2010, a combined 73% of the respondents expected the deal making in mining sector to increase. That sure indicates the nature of developments in the times to come.


Rationale Behind: The primary reason for overseas investments for Indian utilities, mining and metals companies have been to tie their raw material sources. The slower than expected reforms in India have resulted in lower investments and hence, project developments in the domestic industry that have led to serious supply constraints. While production of coal and other minerals has increased, it has not been able to keep pace with the demand. This unmet demand has hit the global markets and has had destabilizing impacts. Prices have increased to all-time highs and do not seem cooling. Consequently, the margins of the steel and other metals manufacturers that have sourced raw materials from the market have come under pressure, while the utilities have faced hurdles in financial closure and project initiation, due to uncertainty in raw materials/fuel supply. The backward integration to mining, therefore, has no longer remained an option for the downstream players whereas the miners have seen their profitability soar. The mining companies have cash pools and are willing to expand their resource bases to be able to cater to the domestic market demand.

Challenges Galore: Destinations of the overseas investments in mining have been largely Indonesia, South Africa, Australia, and some other the emerging markets although there are instances of investments in Canada, USA, and some Latin American countries. Mineral rich matured markets like Canada and Australia offer stable regulatory and statutory environment and access to well-developed financial and mining-services markets. On the other hand, Indonesia has introduced far-reaching changes since January 2010 through the new mining law and its implementing regulations. South Africa has also seen domestic demand spur which is likely to result in export controls, which is widely being advocated in the country. The country also has compliance requirements for Black Economic Empowerment rules, which restrict ownerships and hence, management controls.

While Indian investors have not shied away from picking stakes in mineral assets wherever they could, the challenges are being faced in implementing projects. Significant political risks exist, for example in Russia and Bolivia due to continued expropriations and nationalizations of companies and projects, and in forms of government interventions.

Many countries, particularly the emerging ones, have labyrinthine processes for clearances and approvals. Even in the developed economies, for example in the USA, regulatory frameworks pertaining to mountain-top mining have made delays commonplace. These are tougher to negotiate for foreign investors, who are perceived as neo-colonialists interested only in exploitation of natural resources of the host countries.

Taxation of mining products remains knotty issue. Australia witnessed a tug-of-war between the government and the industry on mining super-profit taxation. With the commodity prices rising, governments tend to consider windfall profit taxes. These combined with import duties on equipment and supplies, several levies, excise duties and royalties may enhance cost of production. Cash flows to equity investments also get impacted by the withholding taxes imposed on dividend repatriations.

Added to the taxation issues are the stability of local currencies and US dollar. The economic uncertainties of the US and the distortions due to suppressed Chinese Yuan have increased the foreign exchange risks of investments for raw material sourcing. Currency fluctuations have the potential to turn mining investments unviable and need active management and monitoring.

Sustainability and social license to mine are being talked about across the globe. Like in India, these may delay or cause cost overruns in mining development and sometimes, significantly erode the benefits of mine-ownership. Adherence to sustainability best practices are also mandated for financing the projects as the World Bank Group and equator-principle banks refrain from lending to non-compliant companies and projects. The African and many other countries desire to allow mining as a vehicle for social development and that results in burdens on the projects that go beyond the statutory obligations.

There may be challenges even at the operational levels. Countries impose restrictions on sourcing and procurements. Indonesia has recently regulated use of contract miners and has made mine-owners’ direct participation in coal winning mandatory. For most other procurements, the country requires tendering process and preference to local suppliers.

Most countries have varying degree of restrictions on employment of expatriates. Securing talent and retaining them can be a challenge in overseas investments. The labor costs have been witnessed to rise sharply with advent of foreign investors in African and South-East Asian countries. Geologists and mining engineers of comparable competencies are difficult to get in the host countries and to relocate Indian resources abroad may be expensive.

The Way Ahead: While it does make sense to invest in mining projects abroad, considering the scarcity of domestic sources and high global market prices, there are huge challenges that need to be overcome to make investment a success. Weaving these challenges in the strategic decision-making process will support prudent investment decisions. There is a need to go abroad with enhanced sensitivity to local aspirations and factor them into the cost estimates to assess cash flows and returns. Sans these, investment in mining overseas may lead to untapped potential and coveted minerals remaining in-situ.

*Dipesh Dipu is director in mining sector consulting practice of Deloitte Touche Tohmatsu India Pvt. Ltd. He can be reached at ddipu@deloitte.com.