Dipesh Dipu, Director - Consulting (Energy and Resources - Mining), Deloitte Touche Tohmatsu India

The interest of the power companies in coal imports is due to supply and security concerns. The growth in domestic coal production is unlikely to match the growth in unprecedented demand for energy. However, the imports may not be as easy as it sounds. Many resource rich countries have been considering giving the priorities to their local needs first. Indonesia has implemented domestic market regulations. South Africa has been toying with the idea of national coal mining company. Hence, securing international supplies may be challenging in times to come, more so, due to the large quantum of deficit from domestic supplies. However, the imported coal will be considered only till it justifies economics. The uptrend in the global thermal coal prices is more likely to suppress the demand.

It looks tough, due to the size of global thermal coal markets, in comparison to the demand-supply gap in the Indian market. While global market size is about 750 million tonnes growing at modest rates of 2-3 per cent on an average per annum, the Indian supply deficits are likely to grow from current levels of about 50 million tonnes to 100 million tonnes in the next year and then to nearly 200 million tonnes by 2017. Large capacities need to be added in the international markets to focus on Indian demand, which seems challenging, due to the large gestation periods, infrastructure requirement, environmental and other sustainability constraints.

Geo-political risks are the major concerns while acquiring assets in Indonesia, Southern African countries and other emerging markets. The level of exploration and investigations done leave confidence gap and these are usually coupled with high value expectations.

The regulatory environment has been in a flux in many countries and resource nationalism has been on a high, when the governments have tended to make coal available for domestic markets. These political risks are sometimes challenging to manage. On the operational front, lack of backbone infrastructure and constraints in employing contractors are also relevant issues. The recent currency fluctuations haven't helped the situation much either.

China has geopolitical strategies worked out with resource acquisition at its core. Several countries, particularly the ones from South-East Asian and African nations, view this as neo-colonialism. Chinese firms which are either state-owned or have strong government support have made aggressive acquisitions and continue to hunt for more. Indian acquisition spree has been primarily driven by private companies and the government owned companies have been slow to react to opportunities.

Suffice it to say that there is more to coal mining than mere economics. While India can leverage its historical relationships with major South East Asian and African countries, China has aggression and cash to counter Indian bids. However, off late, many have been wary of Chinese intentions, which can work in favour of India. The way to go is to keep local interests in the focus and be a good corporate citizen in the host country.

The solutions are all too well known. The infrastructure development for coal transportation has to be two-pronged. The demand side can be managed well with coal washing and focussing on pit-head power projects while supply side can be managed by investment in rail corridors, which is happening albeit at a slower pace.

Public private partnership in rail corridor development will be a welcome step. However, there are challenges of land acquisition, clearances and approvals and other preparatory works, which are at the core of delays in project implementation, whose responsibilities even in PPP formats are likely to remain with the government entity. The other ingredients of PPP are well within sight. The private firms can bring in funds and coal producing or consuming companies can bring in buy commitment.

Considering the acute shortage of coal being projected even in the shorter term, nothing can be defined as being `too aggressive'. While the existing operations have to improve productivity and hence, production, new mines have to be commissioned too. Only productivity and efficiency improvement measures are unlikely to fill in the gaps. These measures, even otherwise, are typically slow processes which require organisational changes, including habits of shovel and dumper operators.

Competitive bidding process within the ambit of captive allocation is likely to enhance the transparency of the process and will incentivise the investors to operationalise the mine sooner to realise the returns. However, it is not a sufficient condition for developing competitive market for coal. That is likely to happen through opening the market to other participants including prospecting, exploration and mining companies and allowing transferability of licenses. The potential excesses of open markets can be checked through regulatory mechanism, which also has been in formative stage since long.

The prices of Indian coal are at a discount when compared with the internationally traded coal even after adjusting for energy content. However, when the e-auction prices are compared, they are likely to be more aligned. This quite clearly indicates that an open market mechanism is likely to result in price rise. But the market distortions should not be omitted when prices are compared. Indian coal market is near monopoly of the government entity and government plays the role of the regulator as well. And then, there is demand-supply mismatch. Couple this with the fact that as a product, Indian coal is not likely to have an export market. When these factors are put together, it seems reasonable that the prices are discounted.

At the policy level, the role of the government should be impartial and each case has to be considered on merit. Ministry of Coal has written to all companies holding captive coal blocks who have not been able to honour their milestones and production commitments. Based on their responses, the Ministry can assess the reasons and take appropriate action, penal or otherwise.

Indian coal geology makes choice of underground mining challenging. The faults, thickness, and several other geo-technical parameters have also been the reasons for lower proportion of underground coal production. Even with mechanisation bordandpillar mining method de-pillaring is around 50 to 60 per cent of coal recovery. Longwall mining method has had mixed results in the Indian context. So, it does appear that technically, underground mining methods may have constraints of production capacities. Added to these are the long development periods, shaft sinking or driving inclines into the seams. The cost of mining, therefore, is higher than opencast mining on per tonne basis. The proportion of underground coal production has been sliding. The reason beneath it is a combination of both technical and economics.

That said, with the depths increasing due to shallower coal being mined out at faster rates, and with environmental concerns rising, India will have to re-look at underground techniques and adopt suitable modifications that may suit Indian coal geology.

It may be tough to identify just one. Its disappointing that a country that boasts of 265 billion tonnes of coal resources, mostly within the depth of 300 meters, has not been able to match the demand and has to look for imports. Indian companies that have project management capacities still are unable to commission their captive mines. And, several that can afford, are investing in coal mine acquisitions abroad. These certainly indicate a lot is required to change in the way Indian coal industry runs. A lot, indeed!