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Wednesday, 20 November 19
FOREIGN DIRECT INVESTMENTS IN COMMERCIAL COAL MINING IN INDIA? - DIPESH DIPU
 In August 2019, Government of India announced its approval for Foreign Direct Investment (FDI) for coal mining, processing and sale. Not that FDI in coal mining sector was new, but novelty in that was that government now permitted foreign ownership of coal mines for commercial sale of coal produced from such mines. He justifications provided by government sources included need for competition in a sector that has been traditionally dominated by government-owned companies Coal India Limited and Singareni Collieries Company Limited; need for enhanced production as here has been shortfall in meeting demand; and, need for newer technologies that may bring in sustainability to coal mining. These indeed are commendable objectives and opening up the sector for foreign participation may certainly be considered a step in the right direction. However, public policy needs to be grounded in realism, and the reality of attractiveness of commercial coal mining in India does not bode well for foreign participation.
The response of government-owned companies for coal blocks on offer for allotment for commercial coal mining was announced in early August 2019 provides the evidence. Nine coal blocks were put on offer for sale of coal in markets and the eligibility for these were restricted to government-owned companies including the state government-owned ones. There were, however, only three coal blocks[1] that received applications by NMDC Limited, Jharkhand State Mineral Development Corporation and Madhya Pradesh State Mining Corporation. This lukewarm response may indicate towards the market sentiments for commercial coal mining in India. It must also be considered here that the coal blocks for allotment for government-owned companies do not have the two-stage auction based bidding for winning the blocks and, thus, the pay-out required to win these coal blocks may be lower in comparison to coal blocks put out for auctions. So, even with lower additional pay-out to government in the form of premium the coal blocks have not found many takers. There may be several underlying economic reasons, which are amplified for foreign participants, and thus, require consideration to evaluate if this approval for FDI in commercial coal mining would have any impact and if it would meet its stated objectives.
The first and the foremost is the economic feasibility of these mines. The foreign, and indeed any private company, would have to participate in auction process for winning a coal block, and commit to a competitive premium to access the resources. This has been an impediment for private sector participation in India, given the evidence of coal blocks awarded for captive consumption in power and non-regulated sectors that include cement, steel and other approved end users. There seems to be some sanity dawning on participants on these auction with every successive rounds of auction, seen from the lower winning premiums, and hence, it may be expected that the trend may continue. Nonetheless, the premium will certainly erode the margins for commercial miners, the extent of this erosion would be a function of degree of competition for the coal blocks. The margins are also likely to be uncertain in view of the price volatility of coal, which in Indian market is pegged with CIL price and a certain premium that reflects typically the discount that IL prices tend to have over energy-equivalent international prices. This uncertainty of prices is likely to be confounded by the uncertainty in demand-supply gap that these commercial miners are required to fulfil. There has been a shortfall in supply in the recent past, evident from the rise in coal imports in the last two years even with the stated objective of the government to reduce coal imports. This may present itself as an opportunity. However, the question is whether this shortfall is likely to sustain, and thus, create a marketplace for commercial miners. With a slump in thermal power generation and nearly absent pipeline of new coal based projects, this assumption may be quite a big one to make and decide in favour of making foreign direct investment in Indian coal mining.
Other important risks pertain to project execution. There have been several impediments in coal mining project implementations, such as procurement of licenses and permits, acquisition of land and rehabilitation and resettlement of project affected people. These, apart from the procedural challenges, involve risk of reputation. Business practices on all these accounts in mining sector have often been marred with controversies and have led to perceptions of externalities in these processes having significant influence on the outcomes. Foreign participants in Indian mining have been wary of these, and hence, have had little success to show even though they have had offices and a few exploration and contract mining projects in India. Apart from reputation, the risks in procurement of licenses and land acquisition create the risks of project delays, which may then translate into cost escalations, thereby impacting project economics. Coal mining projects may have such challenges in attracting foreign direct investment.
There are challenges of talent shortage and financing as well. Innovative technologies that the foreign miners are likely to bring in India will require high quality geo-statisticians, geologists, mine planners and mining engineers. India does produce graduates in these areas of study but quantities do no necessarily reflect quality, which are further compounded by the brain drain of talent into other industries, primarily, information technology. Mining industry in general, and coal mining in particular, has not been able to retain relent in the last decade or so, with advent of opportunities for the smart geoscientists and engineers in alternate industries. Foreign mining companies may find this crippling.
There are challenges in financing too. Coal mining projects may have been good candidates for resource-based financing, but that has not happened on account of several factors, not the least of those being dominance of government-owned companies priding themselves on debt-free balance sheets, and the quality of geological information that may be inferior to global standards. The market for debt for coal mining then often reduces itself to equipment financing with the equipment being securitised to the lenders. Globally preferred model of equipment leasing is still in its relatively early stages of comprehension and acceptance in Indian mining. With limited options of raising finances, the higher degree of equity investments may also be a deterrent for foreign investors as the may have comparable projects competing for scarce capital.
Coal mining industry has been on a downward spiral globally. Foreign large miners have divested or are divesting their stakes in coal projects. Global bankers have committed themselves to not financing coal and coal based power projects. Insurance companies are shying away from coal projects too. The ecosystem for coal mining project execution is dying. Epitaphs are being written on coal and its demise is predicted by governments, investors and policy analysts wold over. But for the coal addiction of Asia, China and India in particular, the demise may have been sooner. Under such gloomy outlook for the industry, with coal mining companies filing for bankruptcies frequently, it would be tough to get these foreign companies to look at Indian destinations favourably. An industry staring at terminal decline may not witness new investors, and old ones that may have been facing severe challenges in their home countries to look out for opportunities in India.
Optimism at this point of time of foreign miners participating in Indian coal mining sector, that presents a challenging business environment, may be misplaced. Only when the government calls for applications for coal blocks for sale of coal with permitted participation for foreign direct investment that the final picture shall emerge.
By Dipesh Dipu
Energy, Natural Resources and Infrastructure Expert
This article originaly published on economictimes and Linkedin
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Thursday, 30 January 20
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- Renaissance Capital - South Africa
- Alfred C Toepfer International GmbH - Germany
- Merrill Lynch Commodities Europe
- Kalimantan Lumbung Energi - Indonesia
- Price Waterhouse Coopers - Russia
- Therma Luzon, Inc, Philippines
- Tamil Nadu electricity Board
- Sojitz Corporation - Japan
- London Commodity Brokers - England
- Siam City Cement - Thailand
- PetroVietnam Power Coal Import and Supply Company
- Karbindo Abesyapradhi - Indoneisa
- Pipit Mutiara Jaya. PT, Indonesia
- Makarim & Taira - Indonesia
- Electricity Generating Authority of Thailand
- Agrawal Coal Company - India
- Ind-Barath Power Infra Limited - India
- Coalindo Energy - Indonesia
- Malabar Cements Ltd - India
- Ministry of Finance - Indonesia
- Energy Development Corp, Philippines
- Port Waratah Coal Services - Australia
- SMG Consultants - Indonesia
- Bukit Makmur.PT - Indonesia
- Iligan Light & Power Inc, Philippines
- Semirara Mining and Power Corporation, Philippines
- The Treasury - Australian Government
- Karaikal Port Pvt Ltd - India
- Meralco Power Generation, Philippines
- Singapore Mercantile Exchange
- Banpu Public Company Limited - Thailand
- Sindya Power Generating Company Private Ltd
- PNOC Exploration Corporation - Philippines
- Global Business Power Corporation, Philippines
- Kideco Jaya Agung - Indonesia
- Aboitiz Power Corporation - Philippines
- Grasim Industreis Ltd - India
- GAC Shipping (India) Pvt Ltd
- GN Power Mariveles Coal Plant, Philippines
- Ministry of Mines - Canada
- Planning Commission, India
- Jaiprakash Power Ventures ltd
- TeaM Sual Corporation - Philippines
- Thiess Contractors Indonesia
- Lanco Infratech Ltd - India
- Meenaskhi Energy Private Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Petron Corporation, Philippines
- Carbofer General Trading SA - India
- AsiaOL BioFuels Corp., Philippines
- Indo Tambangraya Megah - Indonesia
- Marubeni Corporation - India
- Kobexindo Tractors - Indoneisa
- Interocean Group of Companies - India
- ICICI Bank Limited - India
- Kepco SPC Power Corporation, Philippines
- Oldendorff Carriers - Singapore
- Attock Cement Pakistan Limited
- Orica Australia Pty. Ltd.
- Trasteel International SA, Italy
- White Energy Company Limited
- Gujarat Sidhee Cement - India
- McConnell Dowell - Australia
- India Bulls Power Limited - India
- Eastern Energy - Thailand
- Goldman Sachs - Singapore
- Bangladesh Power Developement Board
- Metalloyd Limited - United Kingdom
- Sarangani Energy Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Indonesian Coal Mining Association
- Straits Asia Resources Limited - Singapore
- Mjunction Services Limited - India
- IHS Mccloskey Coal Group - USA
- Ambuja Cements Ltd - India
- The State Trading Corporation of India Ltd
- Dalmia Cement Bharat India
- IEA Clean Coal Centre - UK
- Savvy Resources Ltd - HongKong
- Ceylon Electricity Board - Sri Lanka
- Holcim Trading Pte Ltd - Singapore
- Essar Steel Hazira Ltd - India
- Minerals Council of Australia
- Aditya Birla Group - India
- Kaltim Prima Coal - Indonesia
- Cement Manufacturers Association - India
- Maheswari Brothers Coal Limited - India
- Star Paper Mills Limited - India
- Bharathi Cement Corporation - India
- Globalindo Alam Lestari - Indonesia
- Mintek Dendrill Indonesia
- Indian Energy Exchange, India
- Indika Energy - Indonesia
- Anglo American - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Mercuria Energy - Indonesia
- Uttam Galva Steels Limited - India
- Antam Resourcindo - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- CIMB Investment Bank - Malaysia
- Chettinad Cement Corporation Ltd - India
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- Orica Mining Services - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kohat Cement Company Ltd. - Pakistan
- Semirara Mining Corp, Philippines
- Heidelberg Cement - Germany
- Deloitte Consulting - India
- Formosa Plastics Group - Taiwan
- Parliament of New Zealand
- New Zealand Coal & Carbon
- Bayan Resources Tbk. - Indonesia
- Australian Coal Association
- Rio Tinto Coal - Australia
- Jindal Steel & Power Ltd - India
- Samtan Co., Ltd - South Korea
- Parry Sugars Refinery, India
- OPG Power Generation Pvt Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Energy Link Ltd, New Zealand
- CNBM International Corporation - China
- Global Coal Blending Company Limited - Australia
- Pendopo Energi Batubara - Indonesia
- International Coal Ventures Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Africa Commodities Group - South Africa
- Power Finance Corporation Ltd., India
- Electricity Authority, New Zealand
- Australian Commodity Traders Exchange
- VISA Power Limited - India
- Commonwealth Bank - Australia
- Wilmar Investment Holdings
- Chamber of Mines of South Africa
- Madhucon Powers Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Riau Bara Harum - Indonesia
- Central Java Power - Indonesia
- Mercator Lines Limited - India
- Medco Energi Mining Internasional
- ASAPP Information Group - India
- Rashtriya Ispat Nigam Limited - India
- Romanian Commodities Exchange
- PowerSource Philippines DevCo
- Indogreen Group - Indonesia
- Central Electricity Authority - India
- Miang Besar Coal Terminal - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Bukit Baiduri Energy - Indonesia
- Toyota Tsusho Corporation, Japan
- Intertek Mineral Services - Indonesia
- Directorate Of Revenue Intelligence - India
- GVK Power & Infra Limited - India
- The University of Queensland
- Barasentosa Lestari - Indonesia
- Bhushan Steel Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Posco Energy - South Korea
- Simpson Spence & Young - Indonesia
- Siam City Cement PLC, Thailand
- Sree Jayajothi Cements Limited - India
- Bhatia International Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Eastern Coal Council - USA
- Coal and Oil Company - UAE
- PTC India Limited - India
- South Luzon Thermal Energy Corporation
- Videocon Industries ltd - India
- Vedanta Resources Plc - India
- Ministry of Transport, Egypt
- Latin American Coal - Colombia
- Xindia Steels Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Bhoruka Overseas - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Vizag Seaport Private Limited - India
- Kumho Petrochemical, South Korea
- Kartika Selabumi Mining - Indonesia
- Timah Investasi Mineral - Indoneisa
- Independent Power Producers Association of India
- Salva Resources Pvt Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Larsen & Toubro Limited - India
- Sakthi Sugars Limited - India
- Bulk Trading Sa - Switzerland
- SN Aboitiz Power Inc, Philippines
- Standard Chartered Bank - UAE
- Bank of Tokyo Mitsubishi UFJ Ltd
- MS Steel International - UAE
- San Jose City I Power Corp, Philippines
- LBH Netherlands Bv - Netherlands
- Jorong Barutama Greston.PT - Indonesia
- GMR Energy Limited - India
- Edison Trading Spa - Italy
- Thai Mozambique Logistica
- Binh Thuan Hamico - Vietnam
- Manunggal Multi Energi - Indonesia
- Altura Mining Limited, Indonesia
- Krishnapatnam Port Company Ltd. - India
- Gujarat Mineral Development Corp Ltd - India
- Borneo Indobara - Indonesia
- Economic Council, Georgia
- Georgia Ports Authority, United States
- Coastal Gujarat Power Limited - India
- Leighton Contractors Pty Ltd - Australia
- Tata Chemicals Ltd - India
- SMC Global Power, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Wood Mackenzie - Singapore
- Billiton Holdings Pty Ltd - Australia
- Global Green Power PLC Corporation, Philippines
- Sical Logistics Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
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