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