Coal Insights, December 2016

Contents

6 | COVER STORY

18 Mining equipment sector to show 1015% CAGR in 4 years 25 India Power looking for further acquisitions

A steep slide after a spectacular rebound?

27 Steam coal offers ease in December

The global market expects a steep fall in coal prices, but much depends on China.

28 Coking coal offers recede in December 29 SCCL coal production up after 4 month 30 India’s proven coal reserves increase at 138 billion tons 31 India’s October coal imports down 14% y-o-y 32 Coal India’s production up 5.3% in November

22 | Interview

Aeolus aims to roll radialisation into Indian OTR market The first Chinese OTR maker venturing in India, Aeolus would cash in on its tech prowess.

34 | Feature

35 Indian power units’ coal imports down 17% in Apr-Nov

No coal-power capacity addition required by 2022: CEA

36 Indian cement manufacturer eyeing Canadian pet coke

The Union power ministry aims to raise the share of renewables to nearly 60% by 2026.

36 India’s October cement production up 7.20% m-o-m 37 India adds 1,535 MW of power generation capacity in November

39 | SPECIAL Feature

44 Corporate updates

2016: The year of linkage auctions

47 Beneficiation: The only way to improve India’s coal quality

The year bygone was one of the most eventful years for the Indian coal and power sectors.

58 Nov coal handling by major ports edges down 4% m-o-m 60 Indian Railways’ Oct coal handling up 6.8% m-o-m 62 E-auction data 64 Port data

4 Coal Insights, December 2016

51 | OPINION

A mine of memories Life in a coal mining belt changed radically post-nationalisation, writes V K Arora.

Cover Story

International coal prices

A steep slide after a spectacular rebound?

Arindam Bandyopadhyay

6 Coal Insights, December 2016

Cover Story Peaks Down, Prem Low Vol & met coke price trend ($/ton FOB) 450.00 410.00 370.00 330.00 290.00 250.00 210.00 170.00 130.00 90.00

Peaks Down

in the near-term? What implications does this volatility have on the Indian coal buyers?

What should be the country’s strategy to pre-empt such future shock? Coal Insights talked to people across the coal value chain to get an insight into the causes, impact and outlook on the international coal prices, with special reference to India.

Under the dragon’s wings

If the prolonged slackness in coal prices was caused by China’s withdrawal from the market, the recovery too was prompted by its sudden re-entry. It is almost fortuitous that the timing of China’s re-entry matched perfectly with the time forecasted by the analysts for a recovery in prices.

After the closure of a large number of small mines over the last couple of years, in April 2016, China cut the number of statutory working days for coal miners to 276 days from 330 days a year. The move was aimed at tackling a chronic supply gut that had snapped prices – both internationally and in the domestic market. The measure worked fine – China’s domestic production dropped by about 11 percent during JanuaryOctober, 2016 – and soon there was a supply constraint which prompted the country to go

Prem Low Vol

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bout this time last year, the market had predicted a slow recovery in steam and coking coal prices starting middle of 2016. It was more an expectation, or desperate hope, than a prediction, for no one could be sure exactly what would bring the momentum back. Prices had been in a low trough for about four years and the global economic slowdown has become chronic in nature.

Nevertheless, from April 2016, coal prices indeed started showing signs of an upturn, with coking coal leading the recovery and steam coal joining the league in June. It took a couple of months to confirm that the upward movement was a recovery and not a temporary uptick.

By September 2016, however, the spot prices had buffeted like a raging storm that struck with a vengeance after years of drought. In a matter of 2 months, coking coal prices recovered the entire losses suffered over the past 4 years.

On November 11, 2016, Peak Down prices touched $311 per ton FOB Australia, a record high since June 2011. Along with coking coal prices, met coke prices also jumped up to the levels of $350-355 per ton CFR India in late November, but eased slightly to around $325 per ton CFR in December.

Also, spot steam coal prices doubled in 6 months’ time. South African standard grade coal touched almost $100 per ton FOB in November, while the Australian material breached the $100 per ton level in late October.

The rally, especially in coking coal, was so abrupt that nobody had a clue as to why it was happening and where it was heading to. The market expected a correction by end-September and went on expecting the same every successive week, but the prices just won’t stop moving. And it was not until December that the market finally came into correction mode.

But then, what a correction it was! Within a week’s time, coking coal prices dropped by $40 per ton FOB. Steam coal prices posted a relatively moderate decline of $15 per ton FOB within a month. The roller coaster ride took everyone off their feet. But wait, the pundits say prices are likely to see a steep fall over the next one month.

So, why did the rally occur, in the first place, and how are things going to shape up

Met Coke

for imports again, a move that jacked up spot coal prices and soared coal futures too.

According to the CCI thermal index, China’s thermal coal prices showed a flat trend since May 2015 till June 2016, but a steady rise thereafter, in tune with the increase in thermal coal prices in the international markets. From about 400 yuan per ton, thermal coal (CCI 5500) prices shot up to about 750 yuan between June and November.

This apparently defeated the very purpose of China’s top planning body, the National Development and Reform Commission, which desired to control both prices and supply of coal in the country. So,

by September, the authorities were again considering increasing domestic production by extending the number of working days to 6 from 5 days a week. And finally, in November 2016, the Commission announced that all mines could produce for 330 days each year.

In effect, the global coal market has been dancing to the tune of the Chinese coal buyers, said a Kolkata-based trader in thermal coal. “At the moment, China is regulating its domestic production in such a way so as to extract benefit from the movement in international coal prices. When the prices soar, they stop imports and relax mining restrictions.”

“Historically, the January-March quarter is generally a weak one as far as coal prices are concerned, especially for the South African variety. But for Indonesia, a lot of factors will play a role.”

Coal Insights, December 2016

7

Interview

‘Mining equipment sector to show 10-15% CAGR in 4 years’

T

he Sandvik Group recently merged its mining and construction equipment businesses into one entity, Sandvik Mining and Rock Technology (SMRT), to milk the synergies of both.

The company now plans to focus on underground as well as surface mining in India because, though it is strong in the former, over 90 percent of the business in India comes from the latter. There will be increased demand for power, metals and infrastructure in India, boosted by the rising consumption trends from the middle class and governmental policy decisions. And, Sandvik is geared up to seize the opportunities thrown up by such factors, Subhasis Das, Vice-President and Head of the Sandvik Mining and Rock Technology business in India, tells Madhumita Mookerji. Excerpts from an interview:

How big is the market for mining equipment in India?

The mining industry in India is estimated at around $23 billion in 2016 and forecasted to grow at 6 percent through 2020. Primarily, the two big contributors are coal and iron ore. Coal’s share is around 700 million tons (mt) and iron ore is at about 135 million tons.

Iron ore prices have fallen quite a bit over the last five years – these were at say $115 per ton and today, are languishing at around $50 per ton!

18 Coal Insights, December 2016

How do you see the market panning out in India, say over the next three years? At what rate would the market grow? What will be the enablers and the challenges?

The total contribution of mining to the country’s GDP is around 2.2 to 2.5% percent. With the country’s GDP growing at +7%, the need for increased power supply exists. So demand is there. Even with production of 700 mt of coal, the country is importing about 200 mt of the fuel. It is true that the government recently softened

Subhasis Das, Vice-President and Head, Mining and Rock Technology Business

its ambitious plans of 1 billion tons of coal production by 2020, the reason being oversupplies at ports. However, with the recent surge in international prices, the industry in India will have to come back on track soon.

We definitely have phenomenal coal reserves. Since India’s consumption of coal is primarily by the utilities and other service players, the need for power will only go up because consumption by the middle class will definitely increase. Also, policy decisions like ‘Power for All 24x7’ by the government are pointers to increased electricity consumption in future. These are the enablers that will keep demand buoyant.

In that case, how do you see the mining equipment industry cashing in on such opportunities, going ahead?

Where capex is concerned, the companies follow a cyclical investment trend. So I

Interview

Aeolus aims to roll radialisation into Indian OTR market

Zhang Shutian, Director, International OTR Marketing & Sales

T

Anil Sharma, Regional Manager, South Asia, Middle East and Africa

he first Chinese OTR manufacturer to set its foot on Indian soil, Aeolus Tyre, aims to cash in on its superior technology and radial tyres to grab a share of this market. However, to fulfil its Indian dreams, the domestic mining sector must first embrace the radialisation wave, Zhang Shutian, Director, International OTR Marketing & Sales, and Anil Sharma, Regional Manager, South Asia, Middle East and Africa, tell Arindam Bandyopadhyay. Excerpts:

Aeolus Tyre is a Chinese contender in the Indian OTR market which is dominated by local brands. What prompted you to aspire for the Indian market?

Zhang: Our entry into the Indian market is part of our global expansion plan. We are here not only for OTR tyres, but also for marketing our truck bus radial (TBR) tyres.

Aeolus Tyre is an international brand with a significant presence in China and many other markets. Aeolus Tyre Co Ltd is considered one of the major tyre manufacturers in the world tyre industry.

Our OTR tyres are exported to Europe, North America, Vietnam, Australia, Canada, Chile, South Africa, Mexico, the US, Brazil, Indonesia, Russia and the Middle East, among others. As I said, we are also into TBR, which we started exporting about ten years ago.

In recent years, we have started focusing more on Asia. Among the Asian countries, India is a major market and our coming here is part of the strategy to increase our presence in the subcontinent.

22 Coal Insights, December 2016

What is the production capacity of your OTRs and scale of operations?

Zhang: We have two manufacturing units at Jiaozuoin, China. We produce more than 600,000 sets of bias OTR tyres annually.

The capacity for radial OTR tyres is about 100,000 units per annum.

We don’t have any plant in other countries, but supply the products from our production facilities in China. For the Indian market also, we will export from the China plants although after sales services would be provided through our local partners.

What are your India specific plans and your targets, if any?

Zhang: We have just set foot on the Indian soil. It is too early to speak about sales targets etc. We think the Indian market is not much developed as yet and there is room for growth and improvement. We see great potential for OTR tyres here. However, the market is very competitive and we, therefore, are very careful of abiding with the local regulations and government policies.

Basically, we want to build our brand in this market on a long term basis. As for marketing, we are going to tie up with local distributors.

Please tell us about the genesis of the company?

Zhang: Aeolus is a group company of China National Chemical Corp or ChemChina, which is a state-owned company.

ChemChina recently bought the Pirelli brand, the world’s fifth largest tyre maker and a symbol of Italy’s manufacturing marvel. This acquisition has given ChemChina access to robust technology for making premium tyres, which can be sold at higher margins.

The Aeolus brand is 50 years old and huge in China. Aeolus commands 30-35 percent market share of the Chinese OTR market.

Anil: In India, Aeolus wants to go slow.

We will evaluate the local competition and study the government policies in detail.

Even though we plan to build the brand for the long term, there is no plan to set up a manufacturing unit here, as all our

OPINION

A mine of memories

Life in a coal mining belt changed radically postnationalisation V K Arora

I

n the year 1957, after having completed my ISC from St Xaviers’ College, Calcutta, I did the usual thing. Apply to IIT Kharagpur, BE College, Jadavpur University and Benaras Hindu University (BHU).

Having scored 75 percent marks in ISC, I got admission into all of these institutions of national repute. Coming from a middle class family, the advice given to me was to go to attend a college, which, after passing out, would allow me to earn the maximum amount of money! The Indian School of Mines (ISM), Dhanbad fitted the bill very well. And soon I was on the train to Dhanbad to explore a career in mining, little knowing what the future held out for me.

Dhanbad was a small mining town in the then state of Bihar, about 150 miles from Kolkata. After alighting at the Dhanbad

railway station, one had to take a cyclerickshaw to reach the mining college which was located within a beautiful campus. The school had a main building built by the British in early forties – and a hostel at the back, both boasting similar architecture.

The school had a curriculum on the lines of the Royal School of Mines in the UK. The students passing out of this college were all holding important positions in the then mining industry, I was informed.

Four years in the college passed in a jiffy – the town offered no entertainment except an occasional movie in a cinema house in Dhanbad and another in Jharia. For those who had interest in English movies, there was a Railway Institute near the Dhanbad railway station where English movies were screened by a projector on a white screen, about three times a week. These films came in 5-6 spools and as soon as one finished, it had to be replaced by another spool, which took 4-5 minutes – giving us enough time to have a bite and look around.

This also gave us a chance to see Anglo Indian girls, whose parents were working in Railways and whose numbers were gradually

dwindling day by day. These girls, when they came to watch a movie were always accompanied by their parents or boyfriends, either scenario making it difficult for us to get closer, and we had to be satisfied with a look from a distance. In any case, boys from the Mining College were considered transitory birds and not included in the preferred list that prioritised Anglo Indian officers of Indian Railways! They would also hold dances on Christmas and New Year eve – and in later years, we preferred going to Burnpur Club or Kulti Club, which were more welcoming to those who had money to buy their tickets and spend on the drinks.

Over a period of time, most of the Anglo Indian officers, their families and pretty daughters immigrated to Australia and Canada but while they were in Dhanbad, sighting them in the club or elsewhere was considered a lucky break. Such success stories, whether true or imaginary, were told with much exaggeration to one’s peer group.

Four years in the college – and we were ready to pass out, though a bit apprehensive as to what the future held. The knowledge acquired during the four years was mostly

Coal Insights, December 2016

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66 Coal Insights, December 2016

Tear along the dotted line

Tear along the dotted line