In Indian coal sector, debate on the
legal framework revolves around the efficacy of free markets. Historically,
when coal sector was nationalized, the circumstances appeared to indicate that
private enterprises were too profit focused to channelize their resources for
safety and occupational health issues in the sector. The government ownership
was viewed as a tool to improve safety records and provide appropriate work
environment for the miners. Hence, the Coal Mines Nationalization Act, 1973 was
promulgated and the sector came under the government ownership. Another reason
cited for the nationalization of coal mines was to provide government funding
for development of coal mines for meeting the energy needs of the nation, which
was not seen as forthcoming from the private owners.
The circumstances have changed now.
The private sector participation is being encouraged even though the degree of
participation is still limited. The reason for this change in the policy
outlook is that the gap in demand and supply seems to be rising by the day and
the government-owned companies find themselves unable to match the
expectations. Pricing policies seem distorted and make comparisons with the
international markets irrelevant.
Rationing of coal output is done through
linkages. The linkages have to be converted into fuel supply agreements with
coal suppliers after the end-users meet the project milestones. These end-users
have to provide bank guarantees to comfort the coal supplier about the progress
of the end-use project while the supplier may commit only close to half of the
contracted quantity and still not be liable to any commercial punitive
payments. The calculation of the contracted quantity itself being done on
obsolete normative principles does not seem to cause concerns when these
extremes of rationing behaviour are assessed.
A relatively smaller proportion of
the national coal output is sold through e-auction and the results of trades
through e-auction mode further indicate that the concerns of supply shortages
can force the consumers to resort to procurements irrespective of prices. It
may appear that revulsions of free markets may not be as deep as those
perpetuated by the government owned, controlled and regulated monopoly.
Inevitability of Coal Imports
Coal accounts for 53% of energy
portfolio of India and feeds close to 70% of power generation. Coal is widely
available in India and power generated from coal remains affordable. Coal based
power generation technology has been reliable and robust. On environmental
account, it may have challenges to face in times to come. However, suffice it
to say that till 2032, all projections and estimates portray coal as the prime
mover of Indian energy needs.
With about 54,000 MW capacity being
added in the 11th Plan, the power sector recorded highest ever capacity
addition in a plan period even though it missed the revised target of 62,000 MW
for Plan period (2007-12). The capacity addition target for the 12the Five-Year
Plan (2012-17) is about 79,000 MW, of which close to 66,000 MW capacity is to
be coal based. The capacity addition target for the 12the Five-Year Plan
(2017-21) is about 79,600 MW, of which close to 50,000 MW capacity is to be
coal based.
The accompanying requirement coal
therefore is substantial and domestic supplies seem failing to catch up with
the demand. The demand and supply gap for coal has been rising in the past as
well. The gap reached a level of close to 100 million tonnes for thermal coal
in 2011-12, although the actual thermal coal imports were about 75 million
tonnes. This was due to the reason that electricity distribution companies that
have been in financial distress preferred to shed loads rather than buying high
priced imported coal based power.
The total imported coal demand for
the 2011-12 period was about 137 million tonnes. This seems to continue to rise
in the next five years, to an alarming level of 434 million tonnes. The total
size of the sea-borne global coal trade market is about 1 billion tonnes, which
is estimated to rise at 3-4% per annum on an average, this when the demand from
India is going to rise from about 137 million tonnes now to 434 million tonnes
in the next 5 years. It would be stating the obvious that this will have a
telling impact on coal prices. Coal prices have been volatile since 2003 and
have seen peaks during 2008-09 and then 2010-11. Since the middle of 2011,
prices stabilised in a lower band of USD 100 - 110 per tonne and then feel
further towards the end of 2012 to levels of USD 80 90 per
tonne. This may however be a relatively short-lived trend and when the demand
from Indian power generation begins to pick again, prices will bounce
back.
Domestic and Imported Thermal Coal Price Pooling
Pooling as a concept assumes that
assets of different risk and reward framework are grouped together to diversify
risks and hence, have an impact on the asset prices. The other inherent
assumption for pooling is that proposed assets to be pooled are all within one
controlling entity. In case of price pooling for coal in India, while the first
assumption is true to a large extent, the second is not. The imported coal
basket of CIL seems small as of now when compared to the total imports in the
country, which implies that those who agree to import through CIL may have
advantage over those who have their own mechanisms of import such as their own
FSAs or mines abroad. This would then tend to distort the market.
In some sense, therefore, the pooling of domestic and imported coal prices
sounds a step back into the past from moving a step towards greater market
orientation. There are large number of companies in power sector that are
fundamentally different, some with integrated coal assets in India and abroad while
some totally dependent on domestic supplies. Pooling may make better sense when
all procurements are through one agency that takes care of domestic as well as
imported supplies, and when the imported coal is rationed proportionately for
all.
On diversification front as well, there are concerns. Those power plants that
have thus far been getting assured supply of domestic coal at pit head or at
reasonable distances from mines have assets that would now be clubbed with
imported coal basket, which means their riskiness will certain jump and they
would have to foot the addition price of imports. Compound this with the fact
that price pooling proposal states that these plant may not get any physical
imported coal. To them the proposal appears penal.
Those power plants who may get physical supplies of imported coal while the
financially the impact of imports being on averaged over to all other power
plants stand to gain. Due to accessibility concerns, it may seem logical to
supply imported coal to coastal projects while those near the coalfields get
domestic coal, while everyone bears the costs of importing. This may indicate
the coastal projects alone to benefit from pooling.
The other significant side of the story is that in capacity addition for power
generation, coal supplies have turned out to be the "bubble-maker"
which seems bursting now. Several power projects saw sanction and investments
based on Letters of Assurance (LOA) from Standing Linkage Committee on Long
Term Coal Supplies, which did not take into account the burgeoning gap between
such "assured" supplies and the actual physical availability of coal.
This has led to projects advancing in implementation and getting commissioned
when the coal supplies have not been able to come on line. Those power plants
that went bullish on LOAs are likely ones to depend increasingly on imports and
hence, the pooling mechanism may well be a partial bail out for them.
Coal as a commodity has large variances
in energy content (GCV) and other parameters like moisture content, ash
content, fixed carbon, volatile materials, sulphur content, Hardgrove
Grindability Index and such others. These vary from source to source.
Establishing pooling equivalents may itself be challenging. Further, allocation
of shortages in supply from domestic sources and then pooling at coalfields,
subsidiary or CIL levels will present complexities in the increasing order,
which may make the pricing mechanism a statistical challenge.
Acceptance of the mechanism would depend on whether a power project is likely
to get more physical imported coal that in effect it pays for. Those on the
receiving end of the spectrum may not have an option to exit the system, which
in a way is inconsistent with open market principles.
While the exact impact will depend
upon the quantity of coal that CIL would import, prices thereof and mechanism
of pooling (at coalfields level or subsidiary level or CIL level). But suffice
it to say that cost of domestic coal for the existing consumers would go up.
Estimates have been doing the rounds that at national level coal prices may go
up by 5 to 10% (Rupees 100 to 200 per tonne) which may lead to an increase of 4
to 6 Paise per unit in the electricity tariffs. These, however, are only
indicative.
However, on the investment side, this proposal may make companies reluctant to
import on their own even when there could be strategic advantages, since
imports through CIL with pooling of prices, one can get 'subsidized' imported
coal.
Reforming the Sector
The coal mining sector desperately
needs competition. The dichotomy is glaring that India has close to 285 billion
tonnes of resource base and yet production cannot meet the demand and there is
growing demand for imported coal. The Geological Survey of India estimate of
resource base is gross number and does not account of depletion and
mineability. Even while conservatism is applied to arrive at mineable resource
of 50% of the gross resource, at the production rate of 500 million tonnes per
annum, the reserve to production ratio, an indicator for life of mining, will
be close to 150 years. And still India is expecting to import close to 434
million tonnes in 2016-17.
Regulation of the coal markets and
participants must complement competition. The role of coal regulator in the
transition state from monopoly to free markets can never be overemphasized. It
should facilitate removal of entry barriers, inflow of capital and investments,
creation of commercially prudent trade arrangements and a check on exercise of
market powers by the existing players. For the short run, creation of
competition in coal sector is possible through seeding competitive spirit among
the Coal India Limited subsidiaries. An effective way for the same may be simultaneous
public listing of these subsidiaries in addition to CIL, the holding company
that portrays a picture of monopoly.
Indian coal mining industry needs
private capital for revitalizing itself. Unfortunately, the policy formulation
in India
still continues to focus on expenditures by the government and government-owned
companies. Making exploration and prospecting activities financially attractive
for the private sector may be better than allocating government funds for these
activities, more so when the fiscal deficits of the governments have reached
alarming levels. For this, the nation needs to formulate un-ambiguous mining
development policy guaranteeing right to mine or sell an exploration asset.
Indian private players have been scouting abroad for mineral assets, including
prospecting and exploration properties. They have invested in South Asia,
Africa and even Latin America while Indian
mineral deposits have remained inaccessible for private investment.
Foreign investors in mining consider
country risk lower when there is an explicit commitment and proven track record
for supporting private sector investment. According to 2012 country ratings for
mining investment published by Behre Dolbear, India fares relatively low on
social issues, permitting delays, corruption and tax regimes, which have
significant impact on foreign investments. The foreign investments in the
sector have been, therefore, low.
For attracting private capital in the
industry, the policies need to have precisely defined objectives, transparent
regulatory processes, predictability and efficiency. Indian mining policies are
vaguely worded and appear indicating desirable goals only. The regulatory
frameworks are opaque and un-predictable, and do not have timeframe dimension.
For promoting private sector investment, time-bound approval and objective
processes that can have predictable outcomes would help.
Questions have been raised by several
stakeholders on the efficacy of coal block allocation process, which is
considered laden with scope for discretion and judgment. The Ministry of Coal
has proposed competitive bidding process for coal block allocation. The
competitive bidding process is likely to lend credibility to process of
awarding mineral licenses. Initial payments or committed pay-outs to the
government may also result in commercial incentive for mine owners to develop
the mineral reserves sooner. However, it may increase the cost of production to
an extent. The quantum of such monetary commitments may therefore need to be
prudently fixed.
Other characteristics of coal mining
policies that may help attract private capital are simplicity of the procedures
and stability of fiscal and regulatory regime. The procedures for clearances
and approvals in the Indian context are labyrinthine and involve consents from
scores of authorities. Single window clearance proposal has not got its due,
and effectively, the door to private and foreign investors remains near-shut.
Conclusions
While India needs to focus on
reforming the sector, unfortunately the steps are being taken to continue the
rut and making imports appear less burdensome by price pooling with domestic
supplies. While power generation sector has been increasingly market oriented,
that sources equipment globally, supplies power on a competitive basis and that
has options for merchant sales, the coal sector has been fully within the grips
of government owned companies and prices are not competitive. This distorts the
energy market and has led to rationing behaviour such as coal linkages, which
by themselves have led to aggressive power generation investments, lending and
now restructuring and financial woes. Coal price pooling will bot curb the
excessiveness of risk taking in power generation sector and by spreading the
risks to the entire coal portfolio in the country, the burdensome imported coal
prices are likely to see reluctance on part of all the stake-holders,
government more particularly, to dither on reforms.
Upon reforms, the expectation is that
domestic prices may also see stability, if not a downward adjustment for the
medium term. But more importantly, it will eliminate inevitability of coal
imports which are expensive, cumbersome to handle, cause pressure on foreign
exchange rates and lead to several other challenges.
