Coal Insights, Jan 2014

Chief Editor Rakesh Dubey, Tel: +91 91633 48159, Email: rakesh.dubey@mjunction.in Executive Editor Arindam Bandyopadhyay, Tel: +91 91633 48016 Email: arindam.bandyopadhyay@mjunction.in Editorial Board Alok Srivastava, General Manager, MMTC Ltd Amitabh Panda, Group Director (Shipping & Logistics Operations), Tata Steel Group Anirudha Gupta, Mining & Metals Professional and former Director of P&H Joy Mining Equipment India Ltd Ashok Jain, Managing Director, Saumya Mining Ltd Deepak Bhattacharyya, Chief - Horizon 1 businesses, mjunction services ltd Ganesan Natarajan, WT Director, President & CEO, Ennore Coke Ltd Lawrence Metzroth, Vice President – Analysis & Strategy, Arch Coal Inc M K Palanivel, President – All India Bulk, Samsara Group P S Bhattacharyya, Executive Director, Deepak Fertilisers and Petrochemicals Corporation Ltd S N Choubey, Head – Commercial, ABG Cement Ltd Sandeep Kumar, EIC (Secondary Products), Tata Steel Ltd Shyamji Agrawal, AVP-Central Procurement Cell, Ultratech Cement Ltd Suresh Thawani, Former Managing Director, Tata Sponge Iron Ltd Advertising Soumitra Bose, Tel: +91 92310 00232, Email: soumitra.bose@mjunction.in Sumit Jalan, Tel: +91 91633 48243, Email: sumit.jalan@mjunction.in Subscription Rachita Das, Tel: +91 91633 48045, Email: rachita.das@mjunction.in Toll Free No.: 1800 4192 000 1. Press 8 for publication Email: publication.tbss@mjunction.in Design Debal Ray, Sobhan Jas For suggestions, feedback and queries, please write to coalinsights@mjunction.in

Registered Office mjunction services limited, Tata Centre, 43 J L Nehru Rd, Kolkata 700 071 Website: www.mjunction.in Corporate Head Quarters: Godrej Waterside, 3rd Floor, Tower 1, Plot V, Block DP, Sector V, Salt Lake, Kolkata 700091, Tel: +91 33 6610 6100, Fax: +91 33 6610 6187 Bhilai: Room 321, 3rd Floor, Ispat Bhavan, Bhilai Steel Plant, Bhilai 490001, Tel: +91 788 6451066, Tele/Fax: +91 788 2221071 Bokaro: Room 19, Old Admin Bldg., Bokaro Steel Plant, Bokaro 827001, Tel/Fax: +91 654 2226132 Burnpur: SAIL - IISCO Steel Plant, Materials Building, Order Department, Ground Floor, Burnpur 713325, Telfax: +91 341 2240107 Chennai: Basement, Begum Ispahani Complex, New No 91, Old No 44, Armenian Street, Chennai 600 001, Tel: +91 44 64624733-35, Fax: +91 44 25216536 Durgapur: Room 618, Ispat Bhavan, Durgapur Steel Plant, Durgapur 713203, Tel: +91 343 6510185, Tele/Fax: +91 343 2586946 Jamshedpur: Kashi Kunj, Ground Floor, Road No. 02, Contractors Area, Bistupur, Jamshedpur 831001, Tel: +91 657 6519985/86/90/91, Fax: +91 657 2230040 Mumbai: Jolly Bhavan II, 403, 4th Floor, 7 New Marine Lines, Mumbai 400020, Tel: +91 22 66510663, Tele/Fax: +91 22 66510662 New Delhi: C127, 2nd Floor, A One Plaza, Naraina Industrial Area, Phase I, New Delhi 110028, Tel: +91 11 65661774/65413288, Tele/Fax: +91 11 25897000 Noamundi: C/o TATA Steel Limited, Mines Purchase Cell, PO: Noamundi, Singbhum (West), Jharkhand 833 217, Tel: +91 9204791638/9234368606 Rourkela: Administrative Bldg., Room 624, 6th Flr, Rourkela Steel Plant, Rourkela 769011, Tel: +91 661 6514142/6511412 mjunction believes that all junctionites, customers, suppliers, partners, etc should practice the highest ethical standards in their daily operations.

Report a concern to ethics@mjunction.in Copyright: All rights reserved. No part of Steel Insights can be reproduced or copied in any form or by any means without the prior permission of mjunction services limited. Please inform us if any copyright has been inadvertently infringed.

Disclaimer: This document is for information purpose only. Certain information herein has been acquired from various external sources believed to be reliable. While we have taken reasonable care to compile this report, we in no way assume any responsibility for any error or discrepancy in regards to information contained herein. Readers are requested to make appropriate judgment without any prejudice or compulsion.

EDITORIAL

Dear Readers, The Indian coal sector has come to a juncture where only two possibilities stand out: A complete status quo or a complete overhaul.

The case, at this point, is strong for a status quo. A quick look into the production matrix this year reveals that the domestic supply channels are becoming more and more reliant on Coal India Ltd (CIL). Although CIL is failing to catch up with its targets, consistently so, the case is still worse for Singareni Collieries Company Ltd (SCCL) and the captive coal blocks. While CIL is expected to report production growth, however inadequate, this year, the other two are headed for stagnation or even a fall as compared to last year.

For SCCL, the problems were well publicised and the planners had discounted for its constraints while making the coal production projections for the Twelfth Plan (2012-17) period.

With the captive coal segment, it was otherwise. The substantial increase in India’s coal production of around 250 million tons (mt), over a five-year period, has mainly hinged on the expected increment in captive output. Post-scam and de-allocations, this great potential is fading by the day. In 2013-14, for instance, captive coal production is lagging substantially behind the target as well as last year’s performance.

Production level achieved by CIL, till December, is also short of target, but is still higher than last year’s (corresponding period) output. All in all, coal production by the country is expected to trail behind the annual target by at least 50 mt. If you calculate the import cost of this volume, the additional forex outgo comes to around $5 billion.

So much for the status quo!

Now, consider the overhaul. What if the market is opened up?

What if commercial mining is allowed for the private sector? Will the domestic consumers benefit, or will it lead to exploitation of crucial natural resources by vested interest groups?

The point to note is that the voice in favour of bringing competition in coal, just as in gas or oil, is getting heard, not so much from the consumers but, interestingly, the higher-ups and policy makers. Partha S Bhattacharyya, former Chairman of CIL, wrote in his column in Coal Insights (December 2013) that it is high time India brought competition to CIL by inviting large foreign miners. In the present issue, Montek Singh Ahluwalia, the Deputy Chairman of the Planning Commission and a champion of laissez faire economy, drives home his points on the same lines.

What goes missing here is the voice of the market, ie, the endusers.

What is your view on this? Please write to us if you think there is a better way, a middle path that may be tried, and which could actually work!

Happy reading,

(Rakesh Dubey) Coal Insights, January 2014

3

Contents 6 Steam coal prices flat in January 8 Met coal remains flat in Jan 14 India’s coal production may reach 567 mt 18 Uptrend in met coke prices brings relief to manufacturers 20 India’s power generation up 6.55% in Dec m-o-m 22 CIL to sign FSA with 9 power plants having tapering linkage 24 India’s cement production falls 8.49% in Nov m-o-m 38 Hectronic to bring more parking solutions to India 42 CIO Tyres commissions retreading facility for largest tyre 44 Shantilal C. Mehta: One-stop shop for spare parts 50 MoC supercedes IMG to review 61 blocks 52 Over 550 applications pending with MoC for linkage to cement, DRI 54 Pollution to pull down Chinese growth missile 57 Global steam coal prices may smoulder a bit in 2014 60 US coal consumption estimated at 924 MMst for 2013 63 Early trends project mixed performance for Q3 64 Good Q4 performance expected at Pipavav 66 Traffic handling by major ports up 1.9% in Apr-Dec 67 Railways’ coal handling up 11.18% m-o-m in Dec 68 Coal scam, NMDC’s offshore move create buzz

4 Coal Insights, January 2014

10 | Feature

Now, a scam in coal imports?

Quality slippage in imported coal points a finger to inspection loopholes.

26 | COVER

“Strong case for opening up coal to competition” If petroleum and gas could be opened up, there’s no reason why coal can’t be, says Montek Singh Ahluwalia.

34 | EVENTS

A gala show for mining, minerals and metals IME 2014 is going to see representation from 30 countries, 300 exhibitors in Kolkata.

46 | Government

MoC plans online monitoring system for captive blocks Coal ministry ropes in National Informatics Centre to monitor captive blocks’ development.

61 | INTERNATIONAL

Is it the end of South African coal’s growth story in India?

Pet coke and high sulphur US coals are being preferred by Indian cement manufacturers.

coal market fundamentals

Steam coal prices flat in January $57 per ton FOB on January 20 compared to $57.7 per ton on December 31.

Reports that Colombia will not allow export of coal from Drummond mines in January as the miner has failed to install some loading systems as suggested by the government led to firmness in spot prices of African coal. It also led to some panic booking by Indian utilities.

The spot European-delivered CIF ARA physical thermal coal market remained steady as the loss of supply from US-based miner Drummond’s Colombian terminal was offset by regular South African and US shipments.

The increase came after the Colombian government ordered Drummond to halt coal loading after it missed a January 1 deadline to convert its Puerto Drummond terminal to direct loading.

However, as the month went on most European traders started preparations for the Christmas and New Year holidays and

Coal Insights Bureau

S

pot prices of steam coal in South Africa increased in January because of supply disruptions in Colombia but prices of Australian and Indonesian coal remained flat as China had already restocked ahead of Chinese New Year holidays in February and there was less activity from India.

South African coal (6,000 kcal/kg NAR) prices rose to $86.25 per ton FOB on January 20 compared to $85 per ton FOB on December 31. Australian coal (6,300 kcal/ kg GAR) prices stood at around $82.75 per ton FOB on January 20, down from $85.75 per ton on December 31, according to information available with Coal Insights.

Indonesian coal (5,900 kcal/kg GAR) prices fell marginally to $70 per ton FOB on January 20 compared to $70.25 per ton on December 31. Prices of Indonesian coal (5,000 kcal/kg GAR) eased marginally to

Steam coal FOB ($/ton) Dates

South Africa 6000 NAR

Australia 6300 GAR

Indonesia 5900 GAR

Indonesia 5000 GAR

Indonesia 4200 GAR

Indonesia 3800 GAR

23.12.13

85.5

87.5

70.4

57.5

38.4

32.25

24.12.13

85.25

87.75

70.4

57.8

38.3

32.25

26.12.13

85.25

87.75

70.4

57.8

38.3

32.25

27.12.13

85.25

86.25

70.4

57.8

38.3

32.25

30.12.13

85

86

70.3

57.7

38.25

32.2

31.12.13

85

85.75

70.25

57.7

38.25

32.2

01.01.14

85.25

85.5

70

57.7

38.25

32.2

02.01.14

85

85.6

70

57.7

38.25

32.2

03.01.14

84.25

84.6

70.5

57.8

38.25

32.2

06.01.14

84

84

71

58

38.25

32.2

07.01.14

83.5

83

71

58

38.25

32.25

08.01.14

82

82.75

71

58

38.1

32.25

09.01.14

81.5

82.25

71

58

38

32.25

10.01.14

83.25

82.75

70.75

57.8

38.05

32.15 32.15

13.01.14

84.2

82

70.5

57.6

38.05

14.01.14

85

82.25

70.5

57.6

38.05

32.1

15.01.14

86.25

82.7

70.25

57.1

38.25

32.1

16.01.14

86.5

82.8

70.25

57.1

38.25

32.1

17.01.14

86.7

83

70.25

57.1

38.25

32.1

20.01.14

86.25

82.75

70

57

38.2

32.05

6 Coal Insights, January 2014

softness was witnessed for the low calorific value Indonesian variety amidst the absence of Indian buyers who expect a further easing in freight rates.

Prices also fell after it emerged that the government was trying to make contingency plans for Drummond to ship some coal from nearby ports belonging to other producers.

Spot South African Richards Bay FOB physical prices remained firm with sources pointing out that South African material was becoming more attractive to European buyers amid falling freight rates and lower Colombian supply.

In China, rumours were afloat that some buyers apparently refused to take deliveries of three Capesize or baby-Capesize cargoes of Australian 5,500 kcal/kg NAR coal.

Expecting Chinese thermal coal prices to slip further, Chinese traders either postponed or cancelled purchase plans for overseas thermal coal for the first and early secondquarter shipments.

Many Chinese traders expected domestic thermal coal prices to continue to drop in the coming two months. There is no reason for the price to rebound as electricity demand will not be as strong as in winter. The bearish outlook for the Chinese market also discouraged them from buying any seaborne cargoes.

Steep fall unlikely

Industry analyst reports said steep fall in the prices of thermal coal is unlikely this year as the supply of the commodity used in power generation and cement manufacturing remained balanced. With the market nearly balanced in 2014 it is expected that import demand growth in India, slower supply growth in Indonesia and strengthening economic conditions will limit the magnitude of any further price declines, analyst reports said.

Market sources said they do not expect significant downward pressure on steam coal prices this year even though an oversupply situation in Indonesian and Australian thermal coal market is still expected.

Some sources estimated that 2014 global seaborne coal supply will grow to 819 million tons from 797 million tons last year.

A disciplined production could help prices recover heading into 2014 for both Australian and Indonesian miners, the analysts felt. 

coal market fundamentals

Met coal remains flat in Jan Tamajit Pain

T

he seaborne metallurgical coal market remained flat in January 2014 as sellers reported fewer inquiries from the market at the beginning of the New Year when compared with the end of the last year.

According to information available with Coal Insights, the premium variety was quoted at $130 per ton FOB Australia on January 20, down from $131.50 per ton on December 31. Peak downs prices eased to around $131.25 per ton on January 20, from $133 per ton on December 31. The semisoft variety remained unchanged at $92 per ton on January 20 when compared with December 31.

Market sources said there was flurry of activity in December but the market became quiet in January. The lesser activity in the market meant more pressure on sellers with inflated inventory levels. Sources noted that the lack of activity in the market was exerting downward pressure on prices. This

was coupled with surplus supply in the steel market.

Some industry analysts said steel markets are so oversupplied at the moment that all the steel plants are scaling back and demand for coal is shrinking.

Some analysts said regular spot buyers continued to look for high-vol coals for blends without seeing the need to pay a premium for better coking characteristics.

Oversupply and contract prices

Earlier, Anglo American settled JanuaryMarch 2014 coking coal deals with Asian steelmakers at $143 per ton FOB Australia, down $9 per ton from the fourth quarter of 2013.

The price applies to the miner’s flagship premium low-vol hard coking coal brand German Creek, and is down from $152 per ton FOB in Q4 2013. Premium mid-vol Moranbah North had been settled at $139 per ton, sources said. PCI coal was yet to be set.

Coking coal FOB Australia ($/ton) Dates

Peaks Down (CSR 74%, VM20.7%, Ash-9.7%, S-0.6%, P-0.03%, TM-9.5%)

Prem Low Vol (CSR-71%, VM21.5%, Ash-9.3%, S-0.50%, P-0.045%, TM-9.7%)

Semi soft coking coal

Met coke

23.12.13

136

134

93

272.00

24.12.13

136.5

134.5

93.5

272.00

26.12.13

136.5

134.5

93.5

272.00

27.12.13

133.5

131.5

92

272.00

30.12.13

133

131.5

92

272.00

31.12.13

133

131.5

92

272.00

01.01.14

131

130

91.5

272.00

02.01.14

131

130

91.5

272.00

03.01.14

133

131.5

92

272.00

06.01.14

134

132.5

93.25

272.00

07.01.14

133.75

132.25

93.5

272.00

08.01.14

133.75

132.25

93.75

272.00

09.01.14

133.75

132.2

93.75

272.00

10.01.14

132.75

131.25

93.25

272.00

13.01.14

131.75

130.25

92.5

272.00

14.01.14

131.75

130.25

92.5

272.00

15.01.14

131.75

130.25

92

272.00

16.01.14

131.75

130.25

92

272

17.01.14

131.75

130.25

92

272.00

20.01.14

131.5

130

92

272.00

8 Coal Insights, January 2014

Sources said that oversupply would continue to drive prices lower and they expected prices to drop below $140 per ton FOB in the next quarter. BHP BillitonMitsubishi Alliance (BMA) offered January pricing at $143 per ton FOB, a price which has been accepted by some steelmakers.

The downtrend in met coal prices contrasts with the other major steelmaking raw material, iron ore, which has been rangebound at $130-145 per ton CFR China for the last five months.

Meanwhile, Australia’s Wesfarmers Resources recently said that it had settled January-March contracts for metallurgical coal from its Curragh mine in central Queensland with customers at 5 percent below the October-December quarter’s contract price.

The company did not provide a weighted average FOB price for hard coking coal, semi-hard coking coal and pulverised coal injection from Curragh, but a 5 percent drop from October-December’s weighted average price of $147 per ton FOB would take the new contract price to just under $140 per ton FOB. Wesfarmers did, however, say that the new contract price for hard coking coal from Curragh in January-March was $138 per ton FOB, down 6 percent from $147 per ton FOB in the December quarter.

Wesfarmers Managing Director Stewart Butel said the Brisbane-based miner generally followed the settlement lead of major coal producers, such as Anglo American.

Hard coking coal from Curragh is generally viewed by the market as a secondtier product and is therefore sold at a discount to premium hard coking coal produced by Anglo American’s German Creek mine in Queensland, for example.

Wesfarmers said around 75 percent of coal deliveries in January-March would be at the new contract price, with the balance sold at carry-over prices from the previous quarter.

Met coke prices flat

Meanwhile, met coke prices remained flat in line with coking coal prices. Prices have remained flat at $272 per ton CFR India on January 20.

In the domestic market, prices hovered at around `17,000 per ton, market sources said.

Cover Story

‘Strong case for I opening up coal to competition’

f petroleum and natural gas could be opened up to private players, then the same model can also be adopted for coal. But, for this, amendment to the Coal Nationalisation Act is required, says Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India. He also moots breaking up Coal India Limited, the country’s coal monolith, to make each company independent and compete with each other, though he is a tad worried that the desired number of washeries, both in the public and private sectors, is not coming up.

26 Coal Insights, January 2014

Cover Story

Where the Coal India divestment fiasco is concerned, Ahluwalia says progress is always possible but the last four months before a general election are not the period to look for sudden changes.

However, on a more macro scale, despite the low factory output growth (according to the latest IIP data, industrial output fell 2.1 percent in November 2013 on a year-on-year basis), he is upbeat that India’s growth story is intact. He recently said the next government will have to take forward the process of fiscal consolidation to keep the momentum going. "Ringing alarm bells is not right for a country that is already growing at five percent and has potential to grow over six percent and even 7.5 percent in the long term," Ahluwalia recently said.

Ahluwalia has had a distinguished career arching across the country’s economic firmament. A graduate from Oxford University, he joined the World Bank in 1968, becoming the youngest “division chief” in its bureaucracy, having been put in-charge of the Income Distribution Division in the World Bank's Development Research Centre. He returned to India in 1979 to take up the position of the economic advisor in the Ministry of Finance.

After holding several senior positions in the government, in 2001, he was chosen by the International Monetary Fund to become the first director in the then newly-created Independent Evaluation Office, a role in which he supervised several critical studies on the IMF. In 2004, however, he resigned from the IMF to accept his present position in the Planning Commission.

In a free-wheeling interview to Rakesh Dubey of Coal Insights, Ahluwalia touches upon various issues in the coal sector.

Coal is the most abundant and only significant fossil fuel resource that India has but nothing seems to be working to increase its production. Do you think it is high time the sector is thrown open to competition?

Coal is indeed the major fossil fuel we have. Its p roduction is increasing, but not as much as we want and this is leading to an increased dependence on imports.

The government has taken several steps to improve production and supply, which include expediting forest and environment clearances to coal blocks, both in the public and private sectors. The government is also fast-tracking the construction of three critical rail links for coal evacuation from the Mahanadi, Ib Valley, Mand-Raigarh and North Karanpura coalfields which will enable increased production from the existing mines.

I agree that there is a strong case for opening up the coal sector to full competition by allowing entry of private mining. If we have done it for petroleum and natural gas which are more valuable minerals, there is no reason not to do it for coal. However, this requires amendment of the Coal Mines (Nationalisation) Act, 1973.

Meanwhile, we have introduced flexibility by allowing private investment in

setting up captive coal mines. Production from the captive mines was initially expected to be over 100 million tons (mt) by the end of the 11th Plan but, in fact, it is only about 45 mt.

Captive mining ran into controversies because of allegations of impropriety in the allocation of coal blocks. The government has since then decided that all allocations for private captive mining will be by auction, which will eliminate controversy. The issue of impropriety in the earlier allocations is being investigated. The government has cancelled some allocations. The law will take its course on these past decisions but the position for the future is clear.

It is being felt by a section of the industry that the government should allow large overseas miners to do the initial exploration for coal in India. The exploration licenses can be converted into mining licenses later on. What is your view on this?

This requires amendment in the Coal Mines Nationalisation Act, 1973. At present, private sector participation has to be through the captive mining mechanism and big companies are welcome to participate.

Of the captive blocks, only 38 of the 171 allocated are currently in operation. Don’t you think, by allowing these block holders to supply the surplus from their coal blocks,

The coal will remain the property of CIL and the private sector will get a fee per ton produced. The Model Concession Agreement is being finalised in consultation with all stakeholders. I hope to see bids invited soon.

Coal Insights, January 2014

27

Cover Story the government can encourage them to produce more?

This is an important issue. By allowing captive blocks to expand their production, we could reduce the need to import coal at much higher prices. Increased domestic production from captive blocks would, therefore, be a gain for the economy.

However, legally, it can only be done through some special arrangement, perhaps by selling to Coal India Limited (CIL), which would include reasonable pricing. We are considering some proposals along these lines.

Are you satisfied with the pricing mechanism of domestic coal as compared to its quality?

There is progress in this area. We have migrated to pricing of coal linked to the calorific values. The price of coal at the higher band of the calorific value spectrum is comparable with the international prices of both coking and non-coking coal.

However, in case of the lower quality coal, domestic prices are much lower than the comparable calorific value of coal internationally. However, Indian coal is of high ash and high moisture content and comparisons are, therefore, difficult.

Currently, although domestic coal prices

I think our policy towards energy pricing will be critical for the energy sector to be able to support inclusive growth. If energy prices are kept too low we cannot expect demand to be contained. There is room for subsidising the poor for some minimum requirement but not large sections of the general population. at the pit-head are low, cost of the delivered domestic coal at certain coastal locations is comparable to imported coal because the domestic transportation costs of Indian coal by rail are very high. In some cases, these are more than $20 per ton.

For enhancing coal production, CIL envisages developing some of the coal blocks through the mine developer-cum-operator (MDO) mode for which a model document is being developed by the Planning Commission in consultation with CIL and other stake-holders. What is the status of that model?

This is a very good initiative that will bring private sector efficiencies into the extraction of coal by the nationalised company. The coal will remain the property of CIL and the private sector will get a fee

By allowing captive blocks to expand their production, we could reduce the need to import coal at much higher prices. Increased domestic production from captive blocks would, therefore, be a gain for the economy. However, legally, it can only be done through some special arrangement, perhaps by selling to Coal India Limited (CIL), which would include reasonable pricing. We are considering some proposals along these lines.

28 Coal Insights, January 2014

per ton produced. The Model Concession Agreement is being finalised in consultation with all stakeholders. I hope to see bids invited soon.

Quality of coal supplied by domestic miners is being found to be a major issue in recent times. But CIL claims there is no demand for washed coal from consumers. Why, according to you, are consumers, especially the power sector, not pushing for supply of washed coal? What can the Planning Commission do to encourage the use of washed coal?

There is demand for washed coal, partly because of its benefits and partly because of compliance with the mandatory condition of the use of washed coal prescribed by the Ministry of Environment and Forests (MoEF) for projects located beyond 1,000 km from the source of coal supply. Use of washed non-coking coal has increased manifold during the last 10 years and is currently at 96 mt.

The real problem is that the desired number of washeries, both in the public and private sectors, is not coming up. Coal India itself is not able to make use of the existing washeries because these need to be retrofitted as per the current requirements.

Coal India also failed to build new washeries as proposed in the 11th and 12th Plans.

I understand that Coal India has taken steps to build 20 more washeries with an aggregate capacity of 111 mt in the 12th Plan. CIL is in the process of tendering the projects for building washeries at various locations. There may be some slippage but

Tear along the dotted line

74 Coal Insights, January 2014 Tear along the dotted line