Enhancing Coal Supply Security through imports: India’s prime requirement in achieving growth targets

Holistic development of any economy necessitates engagement of a variety of inputs in a perfectly harmonious way. This perfectly holds true for a growing country such as India for whom adequate availability of inputs like skilled manpower, resources and energy constitute key contributors affecting the level of synergy achieved in realizing growth targets. Hence, lack of any of the required inputs holds the potential of drastically derailing the growth plans of a country thereby affecting all of its populace in some or the other way. In India, legitimate concerns have started brewing since development figures, as indicated primarily through industrial growth numbers; have been nowhere near optimistic, especially during the first two quarters of FY14. However, a silver lining has been seen to be emerging with the electricity sector showing increasingly positive signals since June 2013.

                                        Source: Ministry of Statistics & Programme Implementation (Base Year: 2004-05)     

The manufacturing and mining sectors are on a path to gradual recovery from a severe growth drop observed during FY13, while there has been a substantial growth in the electricity sector. As another part of the story, the government has been repeatedly revising its economic growth rate estimates, always downwards. GDP figures, once targeted to be in the range of 7-8 percent, have been recently revised to about 5-5.5 percent only for FY14 while actual achievement during FY13 has been a decade low of 5 percent.

The key factor responsible for this decline has been the issue of “energy poverty”, especially in rural and semi-rural areas. Most of the countrymen have been haplessly witnessing power cuts ranging from 6-8 hours, and even more, which is also a serious factor hampering the industry growth targets of different states. This “energy poverty” exists on account of a variety of factors on both the generation as well as transmission and distribution front, which specifically constitute shortage of coal, degraded coal quality, transmission constraints and backing down/ shut down of power plants. According to CEA, in April-September 2013 period, Indian power generators observed a shortfall of 73.2 BU in power generation due to a variety of reasons of which coal & gas shortage was observed to be the most predominant one. While coal based power generation (which contributes about 57 percent to the total power generation) continues to be the major source of electricity, a shortfall in supply of coal is causing serious concerns for the whole electricity supply chain.

Coal India Limited, which achieved a production of 452.21 MT as against a revised target of 464 MT in FY13, has not been able to fully satisfy its FSAs with various customers, resulting in customers looking at an alternative supply option of coal imports. In the last five years, coal imports have seen a staggering rise of about 40 percent with coking coal imports increasing at a CAGR of about 11 percent and thermal coal imports increasing at a CAGR of about 17 percent over the last decade. With government estimates suggesting the coal demand-supply gap to reach 292 MT by the end of the 12^th FYP, imports (which stood at about 97.23 MT for thermal coal and 32.2 MT for coking coal in FY13) are estimated to grow to about 200 MT by 2017.   

The inevitability of imported coal playing a major role in satisfying the country’s energy needs is well understood now and the government, along with the major customers of coal, has started strategizing to make the process more economically viable. The key concern in importing coal from nations like Australia, Indonesia and South Africa are the high prices, which are much higher than the domestic coal prices. The direct impact of these high prices falls on the primary consumer which, in India, is the power generation sector for steam coal and steel manufacturing sector for coking coal. For power generators, importing coal is a serious financial burden which cannot be easily transferred to the end consumers, given that the electricity sector is regulated such that inefficient supply of committed quantity attracts heavy penalties for generators. A ray of hope, however, lies in the recent evolution of spot power markets through which prices much higher than the contract prices of electricity can be availed by electricity generators based on real time demand-supply situation. This opportunity has provided them the option to invest in imported coal and has opened up a more reliable supply option of acquisition of coal mines in other coal bearing nations. Even for the steel sector, which imports majority of its coking coal requirements due to low availability of domestic high quality reserves, the option of acquiring coal mines abroad has increasingly become an attractive option to ensure continuous supply.

Coal mine acquisitions by Indian players in countries like Australia, Indonesia, Mozambique etc. has caught up pace since 2005. Various private sector players like Adani, Essar, GMR, NTPC and even public sector players like Coal India & SAIL have aggressively acquired coal-rich mines in these nations. Unfortunately, most of the countries, in which Indian companies have shown interest, have issues similar to those in India, including that of inadequacy of infrastructure for transport and export. Generally, the cost of developing a supporting infrastructure has to be borne by the miner which requires huge investments creating an unfair burden on individual companies. Risks also exist related to political stability, law changes and frequency of tax changes in the nation. An investment can quickly turn unviable for a company with the slightest change in these factors. For example, in 2011, Indonesia’s move to change its mining laws and pricing methods resulted in coal becoming almost four times costlier giving a setback to key buyers. Other major exporting nations are also in the process of amending their laws which could seriously affect investors. Therefore, there’s a requirement of an exhaustive assessment of all the factors prior to investing in overseas assets.

Though the weightage to be assigned to each factor may vary from country to country, an assessment of top coal supplying countries on the basis of some of the major factors has been presented as follows:

       

Countries	Australia	Indonesia	Mozambique	South Africa
Reserves	76.4 BT	5.5 BT	16 BT	30.2 BT
Mining Costs	High	Moderate	Moderate	Moderate
Infrastructure	High	High. Upgradation Requirement	Low. Needs heavy investments	Moderate. Inadequate Rail Infrastructure.
Tax Regime	Transparent.  Abolition of MRRT by July 2014 to bring relief to investors.	Frequent changes in mining laws. Favors domestic players.	Favorable to foreign investors with no such issues of local ownership.	No specific mining policy in place. Encourages local ownership of mines.
Political Stability	Stable	Stable	Stable	Stable
Proximity to Indian Ports	Takes about 18 days to India’s west coast and 14 days to east coast	Takes about 12 days to India’s west coast and 9 days to east coast	Takes about 10 days to India’s west coast and 12 days to east coast	Takes 12 days to India’s west coast and 14 days to east coast

As can be observed from the table, each country has a specific set of advantages and disadvantages which may make it attractive or unattractive to investors depending upon the weightage given to each factor. So it is entirely up to the investor to take the final call on whether or not to acquire a mining asset in the country.

Imports, overseas mine acquisitions or being completely dependent on Coal India for supplies, whatever might be the coal sourcing strategy of various consumers, the ground reality indicates that the demand for coal is growing. With no robust plans of the government for energy diversification, coal will continue to be the prime source of energy in the country for at least the next 30-40 years. Sourcing coal from outside sources has become more and more essential to meet the growing demand. The government has also realized this fact and is continuously working out mechanisms like price pooling of coal to make imported coal more economically viable for the buyers. The best possible strategy for the buyers under this scenario is to source coal from a variety of supply options so as to minimize supply shortage risks to as low level as possible.

This research emanates out of Mr. Puneet Paliwal’s contribution to an Infraline publication titled “Mapping Global Coal Assets”, and he can be contacted on puneet.paliwal@infraline.com in-case of any queries.

                                                     

    Infraline Energy Metals & Mining Research Team