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