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