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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, 16 January 20
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- ASAPP Information Group - India
- Kepco SPC Power Corporation, Philippines
- Indika Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Globalindo Alam Lestari - Indonesia
- Billiton Holdings Pty Ltd - Australia
- SMG Consultants - Indonesia
- Kumho Petrochemical, South Korea
- Meralco Power Generation, Philippines
- Interocean Group of Companies - India
- Orica Australia Pty. Ltd.
- CNBM International Corporation - China
- Savvy Resources Ltd - HongKong
- Ministry of Mines - Canada
- ICICI Bank Limited - India
- Sindya Power Generating Company Private Ltd
- Ministry of Transport, Egypt
- Central Java Power - Indonesia
- Bukit Baiduri Energy - Indonesia
- Indogreen Group - Indonesia
- Semirara Mining Corp, Philippines
- Marubeni Corporation - India
- PetroVietnam Power Coal Import and Supply Company
- Energy Development Corp, Philippines
- Economic Council, Georgia
- Sakthi Sugars Limited - India
- Malabar Cements Ltd - India
- Sical Logistics Limited - India
- Metalloyd Limited - United Kingdom
- Miang Besar Coal Terminal - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Price Waterhouse Coopers - Russia
- Gujarat Electricity Regulatory Commission - India
- Bukit Makmur.PT - Indonesia
- Ministry of Finance - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bhatia International Limited - India
- Toyota Tsusho Corporation, Japan
- Aditya Birla Group - India
- Indonesian Coal Mining Association
- Star Paper Mills Limited - India
- IHS Mccloskey Coal Group - USA
- Neyveli Lignite Corporation Ltd, - India
- Gujarat Sidhee Cement - India
- Meenaskhi Energy Private Limited - India
- Manunggal Multi Energi - Indonesia
- Bulk Trading Sa - Switzerland
- Jorong Barutama Greston.PT - Indonesia
- Bharathi Cement Corporation - India
- Latin American Coal - Colombia
- Bhoruka Overseas - Indonesia
- Cement Manufacturers Association - India
- Eastern Energy - Thailand
- Renaissance Capital - South Africa
- PTC India Limited - India
- TeaM Sual Corporation - Philippines
- Kapuas Tunggal Persada - Indonesia
- Intertek Mineral Services - Indonesia
- London Commodity Brokers - England
- India Bulls Power Limited - India
- Borneo Indobara - Indonesia
- Energy Link Ltd, New Zealand
- Singapore Mercantile Exchange
- Dalmia Cement Bharat India
- Chettinad Cement Corporation Ltd - India
- Aboitiz Power Corporation - Philippines
- Electricity Generating Authority of Thailand
- IEA Clean Coal Centre - UK
- Siam City Cement PLC, Thailand
- Salva Resources Pvt Ltd - India
- Thiess Contractors Indonesia
- Jaiprakash Power Ventures ltd
- Formosa Plastics Group - Taiwan
- European Bulk Services B.V. - Netherlands
- Riau Bara Harum - Indonesia
- Africa Commodities Group - South Africa
- Petron Corporation, Philippines
- Attock Cement Pakistan Limited
- Baramulti Group, Indonesia
- Commonwealth Bank - Australia
- GAC Shipping (India) Pvt Ltd
- Sarangani Energy Corporation, Philippines
- McConnell Dowell - Australia
- New Zealand Coal & Carbon
- Barasentosa Lestari - Indonesia
- PNOC Exploration Corporation - Philippines
- Timah Investasi Mineral - Indoneisa
- GN Power Mariveles Coal Plant, Philippines
- Indo Tambangraya Megah - Indonesia
- Kideco Jaya Agung - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Holcim Trading Pte Ltd - Singapore
- MS Steel International - UAE
- Coal and Oil Company - UAE
- Australian Commodity Traders Exchange
- Offshore Bulk Terminal Pte Ltd, Singapore
- CIMB Investment Bank - Malaysia
- Vizag Seaport Private Limited - India
- Uttam Galva Steels Limited - India
- Directorate Of Revenue Intelligence - India
- Pendopo Energi Batubara - Indonesia
- Lanco Infratech Ltd - India
- Cigading International Bulk Terminal - Indonesia
- International Coal Ventures Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Central Electricity Authority - India
- Videocon Industries ltd - India
- The University of Queensland
- Sree Jayajothi Cements Limited - India
- South Luzon Thermal Energy Corporation
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bhushan Steel Limited - India
- AsiaOL BioFuels Corp., Philippines
- Trasteel International SA, Italy
- Power Finance Corporation Ltd., India
- Eastern Coal Council - USA
- Edison Trading Spa - Italy
- The Treasury - Australian Government
- Wood Mackenzie - Singapore
- Georgia Ports Authority, United States
- Kartika Selabumi Mining - Indonesia
- Orica Mining Services - Indonesia
- Global Green Power PLC Corporation, Philippines
- Deloitte Consulting - India
- Ambuja Cements Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Indian Energy Exchange, India
- Kalimantan Lumbung Energi - Indonesia
- Vedanta Resources Plc - India
- LBH Netherlands Bv - Netherlands
- VISA Power Limited - India
- Siam City Cement - Thailand
- Australian Coal Association
- SMC Global Power, Philippines
- San Jose City I Power Corp, Philippines
- Coastal Gujarat Power Limited - India
- Binh Thuan Hamico - Vietnam
- Parliament of New Zealand
- Samtan Co., Ltd - South Korea
- Sojitz Corporation - Japan
- SN Aboitiz Power Inc, Philippines
- Makarim & Taira - Indonesia
- Therma Luzon, Inc, Philippines
- Carbofer General Trading SA - India
- GMR Energy Limited - India
- Jindal Steel & Power Ltd - India
- Romanian Commodities Exchange
- Vijayanagar Sugar Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- Chamber of Mines of South Africa
- Anglo American - United Kingdom
- Asmin Koalindo Tuhup - Indonesia
- Thai Mozambique Logistica
- Oldendorff Carriers - Singapore
- Heidelberg Cement - Germany
- Kobexindo Tractors - Indoneisa
- Parry Sugars Refinery, India
- Mintek Dendrill Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- GVK Power & Infra Limited - India
- Karaikal Port Pvt Ltd - India
- Goldman Sachs - Singapore
- Ind-Barath Power Infra Limited - India
- Global Business Power Corporation, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Kaltim Prima Coal - Indonesia
- Minerals Council of Australia
- Leighton Contractors Pty Ltd - Australia
- Planning Commission, India
- Rio Tinto Coal - Australia
- Essar Steel Hazira Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Standard Chartered Bank - UAE
- Asia Pacific Energy Resources Ventures Inc, Philippines
- PowerSource Philippines DevCo
- Posco Energy - South Korea
- Wilmar Investment Holdings
- Port Waratah Coal Services - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Grasim Industreis Ltd - India
- OPG Power Generation Pvt Ltd - India
- Mjunction Services Limited - India
- Rashtriya Ispat Nigam Limited - India
- Banpu Public Company Limited - Thailand
- Maharashtra Electricity Regulatory Commission - India
- Agrawal Coal Company - India
- Semirara Mining and Power Corporation, Philippines
- Iligan Light & Power Inc, Philippines
- Simpson Spence & Young - Indonesia
- Medco Energi Mining Internasional
- Xindia Steels Limited - India
- Coalindo Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- Indian Oil Corporation Limited
- Kohat Cement Company Ltd. - Pakistan
- Mercator Lines Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Gujarat Mineral Development Corp Ltd - India
- Tata Chemicals Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bangladesh Power Developement Board
- Maheswari Brothers Coal Limited - India
- Alfred C Toepfer International GmbH - Germany
- Larsen & Toubro Limited - India
- White Energy Company Limited
- Mercuria Energy - Indonesia
- Madhucon Powers Ltd - India
- The State Trading Corporation of India Ltd
- Bank of Tokyo Mitsubishi UFJ Ltd
- Electricity Authority, New Zealand
- Altura Mining Limited, Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Antam Resourcindo - Indonesia
- Merrill Lynch Commodities Europe
- Tamil Nadu electricity Board
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Independent Power Producers Association of India
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