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