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