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