B. Akala ,Former Chairman and Managing Director ,Central Coalfields Ltd. and Central Mine Planning and Design Institute Ltd.
It is unfortunate that, our country, despite having large coal reserves (more than 270 BT of total reserves out of which about 235 BT are of thermal category) is depending more and more on imported coal. It takes more than five years to start producing coal from a mine after the coal block is allotted and the operator decides to go for mining. The delay is caused by land acquisition, obtaining mining lease and forest or environmental clearances.
The absence of a proper system is further widening the gap between the demand and supply. The delay in getting the required coal supplies - be it through the coal linkage mechanism or through allotment of coal block is the main reason. It is so unpredictable that sometimes it becomes almost impossible to source domestic coal with a definite schedule. Cheaper coal in the country, as a result, is turning out to be a `no-coal' situation. The companies, therefore, prefer to pay a little more and get assured supplies. On the top of it, imported coal especially benefits the power plants located in coastal locations. The subject of power houses switching over to washed coal is under debate for the last 15 years.
For some reasons, many Gencos were (and some are even today) reluctant to accept washed coal. Therefore, sufficient numbers of non-coking coal washeries were not developed in the past either by CIL or the private parties. Now that the Gencos are realising the techno - economical - environmental advantages of using washed coal for power and are targeting for processed coal, both CIL and other private operators are coming forward with new initiatives to build more of non-coking coal washeries. So much so, CIL has an ambitious plan to have more than 100 million tons of washed non-coking coal for power sector.
While the large gencos, with higher coal requirement, should go for acquisition of coal mines overseas, the small companies with smaller capacities for power generation can go for coal import through long term agreements. Having own coal concessions provide more of confidence to have assured and uninterrupted coal supplies, where as in the case of import option there is always a second/third party on whom the Genco has to depend, which, sometimes, may belie the supplies. Japan went for acquiring coking coal mines 50 years back to have assured long term supplies for their steel plants and are still comfortable, when others are running for coal, sometimes unsuccessfully, by paying more.
The Government has taken this right initiative, of allotting captive coal mines to the specific end users like power, steel, cement and coal washing in 1993. Many Indian companies have already taken the advantage of this initiative and as many as 210 or so coal blocks have been allotted for the captive users. What is becoming a matter of concern is the delay in developing these captive coal blocks to help bridge the coal demand - supply gap. A typical example is the delay that NTPC is experiencing to develop and start a large opencast mine in Jharkhand for the past five years. If these issues are addressed, there will be a quantum jump in the coal production through this route, which will take care of the present fuel availability crisis. The very availability of viable coal concessions, fulfilling three basic parameters such as the quantity/quality of reserves, geo-mining conditions and techno-economic viability. Not many are left for economic exploitation in the overseas countries and those remaining are either technically challenging or economically less favourable. Secondly, the lack of infrastructure to develop concessions in remote areas where the concessions are available, inadequate local transport logistics from the mine to transfer point and from there to loading port, and last but not the least, is the chance of changes in the political or social conditions in the country which may affect the ownership structure. Yes, such risks cannot be ruled out and these will put the acquiring companies in to a sort of uncertainty. But as the international trade and business is becoming global friendly, this must not come in the way for acquisition of coal concessions overseas. As the saying goes, it is "better late than never".
If viable coal blocks are available, one must go full hog to acquire them and make full use of the advantages. Large utilities like NTPC, SAIL and other large Gencos and steel plants must go for acquiring coal blocks in countries like Mongolia, Russia, Canada, Columbia, etc., besides the normal destinations such as Indonesia, South Africa, Australia, Mozambique and Botswana, etc.
Minesh Dave ,Vice President and Chief Representative - Indonesia ,Tata Power Company Limited
Indian Power Sector, growing at a tremendous pace, has perhaps set this trend of securing their imported coal requirements through investments in overseas coal mines. Though it began as a means to access coal at a price that would work for them in the Indian context, these investments are fast becoming a necessity for securing the coal supplies, given the continued supply shortages and logistics uncertainties in the domestic market.
The demand supply gap is primarily responsible for prompting Indian Gencos to go for imported coal. The secondary factors are poor quality of Indian coal and transportation bottlenecks for non-pithead plants.
Though not entirely competitive, the imported coal could work for coastal locations if one could negotiate some discounts to the market prices.
If the fuel prices were entirely a pass through in the tariff, it would make sense to enter into long term supply agreements with the coal suppliers. However, India has a very uneven competitive scenario where the bulk of the generation is still based on low price domestic coal supplies. This makes the Gencos to look at investing in coal mines to, at least partly if not fully, offset the exposure to fuel prices. That would be the most logical step.
The Indian coal sector continues to be tightly controlled by the government. There appears to be a lack of transparency in allocation of captive coal blocks. Further, those who are allocated the captive coal blocks face tremendous challenges in developing them due to issues relating to land acquisition, environmental and forestry clearance, to name a few. Every country has its own challenges ranging from quality of asset to legal certainty, land acquisition to clearances and approvals, logistics to plain economics, ethical challenges to local culture. The investor needs to weigh them while choosing the right asset. To given an example, Australia has quality assets and clear regulations but the mining and transportation costs may not make economic sense for 100 per cent import-dependent Gencos. On the other hand, Indonesia makes a lot of sense in terms of geographic proximity to India and mining and transportation costs. However, the available assets are generally for low rank coal often with inadequate exploration to back up claimed resources and logistically challenged.
Energy security is becoming a global concern and I believe that such risks are manageable if one genuinely adds value to host country's economy by participating in other developmental opportunities, apart from mining.
Kameswara Rao ,India Leader for Energy, Utilities, and Mining ,PricewaterhouseCoopers Pvt. Ltd.
Coal sourcing is a key strategy for companies in a tariff sensitive power market like India. The shortfall in local coal supply makes it necessary for Indian Gencos to look overseas and the ownership of mines offers them both, supply security and the upside of higher asset values. The pricing certainty, however, has come into some doubt in many major coal producing countries. It may put off investors in the near-term but going forward, tight local supply conditions will leave us with no choice but to acquire coal mines overseas. Unlike China, where over 70 percent power sold by utilities is to industries that have an ability to pass on higher costs into manufactured goods, industrial consumers account for only 35 percent of Indian utilities' sales. Moreover, as coal prices have been very volatile in recent years, mine ownership is a good hedge, especially for power plants structured on competitive bids where pass-through is in part indexed to longer term contract prices.
The primary reasons for Indian companies going for overseas coal mine acquisitions is the difficulty in securing local sources, transport and handling capacity bottlenecks, and the time it takes to develop mines to market. These challenges are serious enough to drive Indian Gencos to seek supplies overseas. Further, the Government itself has been advising utilities to import coal, given local supply limitations. For example, coastal power plants are advised to expect only 70 percent of their normative coal requirement. Further, domestic Fuel Supply Agreements for new projects with long-term linkage commercially assure only 50 percent of contracted quantity and the liability for under-delivery is capped at 10 percent. This increases the financing risk for commercial plants and overseas mines are increasingly an important part of the strategy.
Having said that, pricing remains a challenge, and utilities based on imported coal will need security of adequate cost pass-through provisions in the supply contracts. The current import price differential is acceptable for projects structured at current merchant rates, but is less attractive when investments in port and rail transportation are together taken into account in a dynamic analysis. In the longer run, however, the sheer pressure of demand will prompt Gencos to secure overseas supplies.
Quality is one of the many parameters that go into a Gencos' decision to acquire coal mines. The determinant is the availability of coal and time-to-market. The quality aspect can be effectively reduced to cost, and so is easily modelled. A greater need is to enhance the off-take of domestic washed coal. The current washing capacity also limited at 70 million tonnes, which is about 12 percent of local use, and even the planned capacity addition of 110 million tonnes over the next 2-3 years is not sufficient to meet the washed coal requirement.
The decision to buy via traders or acquire mines depends on the company's sourcing objectives, on the terms of the contracts, and the local regulations. In general, the larger power companies, with ability to invest in higher capacity and more complex mines will find ownership more attractive, as it can offer higher returns. It must also be noted that the long-term contracts assure only the quantity of supply, while the pricing is periodically reset to the market. This means that ownership of coal mines helps investors gain both ways viz., better margins on power sales when coal prices rule low and appreciation in asset value when coal prices move up. Often the local regulations may diminish some of these advantages, for example, when restrictions are placed on sale conditions or repatriation, and in some cases, political risk may start to outweigh the advantages. Some Indian Gencos have made bad calls in acquisition of coal mines by rushing through these decisions without adequate risk assessment.
The progress on development of captive coal has been slow for various reasons, such as delays in local approvals, inadequate internal capacity, and multiple-ownership where the awardees come with different priorities and interests. Also, the state-owned power utilities and state mineral development companies have lagged significantly, making limited progress on development of their coal blocks. Of the 122 coal blocks allocated from 1993 to date, less than 30 have commenced production. Thus, against the 11th Plan expectation to produce 104 MTPA coal from captive blocks, actual production is quite dismal. Even with accelerated development of captive coal segment, all forecasts suggest that India will face a wide deficit on account of rising demand. The previous round of captive coal allocation has shown that demand for captive coal outstrips availability by a wide margin. Given this, it is inevitable that end-users will look at imports and overseas acquisitions to meet future capacity.
There are many challenges in investing overseas in mining, and proper homework is needed to avoid the common pitfalls, such as of inadequate appreciation of local regulations, adequacy and quality of technical studies, impact of taxes, and proper assessment of mining costs. It has not helped that legislative changes in mining countries and differing interpretation over issues such as transfer pricing and production sharing and the absence of implementing regulations have come at the same time. Then, estimation of coal reserves and valuation, have been a usual bug-bear and many transactions fall through when these could not be supported. The company's clarity on its objectives is also important and those of them with a clear visibility of end-use are better able to address the remaining challenges in negotiations to clinch the deal.
The political and regulatory risks in overseas mining investment have become important with several forms of resource nationalism appearing, such as windfall taxes, domestic market obligations, mandatory local ownership, etc. Both, the developed and developing mining countries are equally susceptible to these challenges. Indian Gencos will need to understand these risks better to take suitable steps to mitigate the risk, such as by diversifying sources, taking out risk insurance and joint venture partnership.