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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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Tuesday, 14 January 20
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- Petron Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Xindia Steels Limited - India
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- Bank of Tokyo Mitsubishi UFJ Ltd
- Lanco Infratech Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Sinarmas Energy and Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Therma Luzon, Inc, Philippines
- London Commodity Brokers - England
- Ambuja Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Malabar Cements Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Global Business Power Corporation, Philippines
- Ministry of Transport, Egypt
- Renaissance Capital - South Africa
- Star Paper Mills Limited - India
- Metalloyd Limited - United Kingdom
- Anglo American - United Kingdom
- Grasim Industreis Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Karbindo Abesyapradhi - Indoneisa
- Gujarat Sidhee Cement - India
- Semirara Mining Corp, Philippines
- Altura Mining Limited, Indonesia
- GMR Energy Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Planning Commission, India
- International Coal Ventures Pvt Ltd - India
- Wood Mackenzie - Singapore
- Electricity Generating Authority of Thailand
- GAC Shipping (India) Pvt Ltd
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- Intertek Mineral Services - Indonesia
- Ind-Barath Power Infra Limited - India
- CNBM International Corporation - China
- Coalindo Energy - Indonesia
- Global Coal Blending Company Limited - Australia
- Energy Link Ltd, New Zealand
- Antam Resourcindo - Indonesia
- Timah Investasi Mineral - Indoneisa
- Billiton Holdings Pty Ltd - Australia
- Baramulti Group, Indonesia
- Iligan Light & Power Inc, Philippines
- OPG Power Generation Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Maharashtra Electricity Regulatory Commission - India
- Ministry of Mines - Canada
- The Treasury - Australian Government
- Meenaskhi Energy Private Limited - India
- Attock Cement Pakistan Limited
- Madhucon Powers Ltd - India
- Kobexindo Tractors - Indoneisa
- Dalmia Cement Bharat India
- Bukit Baiduri Energy - Indonesia
- LBH Netherlands Bv - Netherlands
- Bhushan Steel Limited - India
- European Bulk Services B.V. - Netherlands
- Singapore Mercantile Exchange
- New Zealand Coal & Carbon
- Vedanta Resources Plc - India
- Orica Mining Services - Indonesia
- Meralco Power Generation, Philippines
- Bangladesh Power Developement Board
- Kalimantan Lumbung Energi - Indonesia
- Bharathi Cement Corporation - India
- Formosa Plastics Group - Taiwan
- Bhatia International Limited - India
- GVK Power & Infra Limited - India
- Power Finance Corporation Ltd., India
- Posco Energy - South Korea
- Kartika Selabumi Mining - Indonesia
- Rio Tinto Coal - Australia
- Semirara Mining and Power Corporation, Philippines
- Marubeni Corporation - India
- Manunggal Multi Energi - Indonesia
- Coal and Oil Company - UAE
- PNOC Exploration Corporation - Philippines
- Goldman Sachs - Singapore
- VISA Power Limited - India
- Mjunction Services Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Binh Thuan Hamico - Vietnam
- SMG Consultants - Indonesia
- Globalindo Alam Lestari - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Pendopo Energi Batubara - Indonesia
- Orica Australia Pty. Ltd.
- Bayan Resources Tbk. - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- PowerSource Philippines DevCo
- Mintek Dendrill Indonesia
- Sojitz Corporation - Japan
- Directorate Of Revenue Intelligence - India
- Minerals Council of Australia
- Barasentosa Lestari - Indonesia
- Electricity Authority, New Zealand
- The University of Queensland
- TNB Fuel Sdn Bhd - Malaysia
- The State Trading Corporation of India Ltd
- Siam City Cement PLC, Thailand
- Energy Development Corp, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Jaiprakash Power Ventures ltd
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Gujarat Electricity Regulatory Commission - India
- MS Steel International - UAE
- Larsen & Toubro Limited - India
- Global Green Power PLC Corporation, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Thiess Contractors Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Mercator Lines Limited - India
- Ministry of Finance - Indonesia
- Cement Manufacturers Association - India
- Essar Steel Hazira Ltd - India
- Eastern Energy - Thailand
- CIMB Investment Bank - Malaysia
- Sakthi Sugars Limited - India
- SN Aboitiz Power Inc, Philippines
- Uttam Galva Steels Limited - India
- Kapuas Tunggal Persada - Indonesia
- Jindal Steel & Power Ltd - India
- Medco Energi Mining Internasional
- Thai Mozambique Logistica
- Sical Logistics Limited - India
- Agrawal Coal Company - India
- Kumho Petrochemical, South Korea
- Parry Sugars Refinery, India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Africa Commodities Group - South Africa
- Indo Tambangraya Megah - Indonesia
- Central Java Power - Indonesia
- Edison Trading Spa - Italy
- Bhoruka Overseas - Indonesia
- Videocon Industries ltd - India
- South Luzon Thermal Energy Corporation
- Samtan Co., Ltd - South Korea
- ASAPP Information Group - India
- SMC Global Power, Philippines
- Kepco SPC Power Corporation, Philippines
- Merrill Lynch Commodities Europe
- IHS Mccloskey Coal Group - USA
- Salva Resources Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Heidelberg Cement - Germany
- Siam City Cement - Thailand
- Eastern Coal Council - USA
- Economic Council, Georgia
- Wilmar Investment Holdings
- Toyota Tsusho Corporation, Japan
- Sindya Power Generating Company Private Ltd
- San Jose City I Power Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Deloitte Consulting - India
- Australian Commodity Traders Exchange
- Pipit Mutiara Jaya. PT, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Indian Energy Exchange, India
- Indika Energy - Indonesia
- Carbofer General Trading SA - India
- Leighton Contractors Pty Ltd - Australia
- Karaikal Port Pvt Ltd - India
- Independent Power Producers Association of India
- AsiaOL BioFuels Corp., Philippines
- Asmin Koalindo Tuhup - Indonesia
- Savvy Resources Ltd - HongKong
- White Energy Company Limited
- PetroVietnam Power Coal Import and Supply Company
- Port Waratah Coal Services - Australia
- Interocean Group of Companies - India
- Ceylon Electricity Board - Sri Lanka
- Miang Besar Coal Terminal - Indonesia
- Australian Coal Association
- PTC India Limited - India
- Sarangani Energy Corporation, Philippines
- Makarim & Taira - Indonesia
- IEA Clean Coal Centre - UK
- Commonwealth Bank - Australia
- Parliament of New Zealand
- Simpson Spence & Young - Indonesia
- Aditya Birla Group - India
- India Bulls Power Limited - India
- Price Waterhouse Coopers - Russia
- Aboitiz Power Corporation - Philippines
- Indian Oil Corporation Limited
- GN Power Mariveles Coal Plant, Philippines
- Mercuria Energy - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Standard Chartered Bank - UAE
- Straits Asia Resources Limited - Singapore
- Indogreen Group - Indonesia
- Tamil Nadu electricity Board
- McConnell Dowell - Australia
- Bulk Trading Sa - Switzerland
- TeaM Sual Corporation - Philippines
- Rashtriya Ispat Nigam Limited - India
- Indonesian Coal Mining Association
- Vijayanagar Sugar Pvt Ltd - India
- Borneo Indobara - Indonesia
- Banpu Public Company Limited - Thailand
- Chettinad Cement Corporation Ltd - India
- Chamber of Mines of South Africa
- Vizag Seaport Private Limited - India
- Georgia Ports Authority, United States
- Riau Bara Harum - Indonesia
- Trasteel International SA, Italy
- Central Electricity Authority - India
- Tata Chemicals Ltd - India
- Latin American Coal - Colombia
- Romanian Commodities Exchange
- Kideco Jaya Agung - Indonesia
- Maheswari Brothers Coal Limited - India
- ICICI Bank Limited - India
- Sree Jayajothi Cements Limited - India
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