Commercial coal mining in India: Will the eagles dare?

Sumit Maitra

Introduction of commercial mining couldn’t have been timed better and has generated enough curiosity and also serious interest from investors and analysts’ community across the globe.

“There is interest also from nontraditional business companies who weren’t there in the mining sector previously. They are also showing interest,” said M Nagaraju, Joint Secretary and the nominated authority of Ministry of Coal.

“After the launch, we had few interactions with the business community, received number of queries so far and whatever interests we have received are also very unprecedented,” Nagaraju, the key ministry official working on the auction process, said.

The reasons behind such interest are not hard to find. The current situation of oversupply and falling demand of coal is but a small blip. And when the economy recovers from the current pandemic-induced slowdown, and stranded power plants get new lease of life and begin generation, country would need coal much more than Coal India can manage to produce, believes PS Bhattacharyya, former chairman of Coal India Ltd.

Commercial mining would also bring a sea-change to the way coal is handled and transacted in the country.

In a duopoly situation, it’s a sellers’ market and the one-sidedness of the transactions is seen in the Fuel Supply Agreements that Coal India and Singareni Collieries sign with its customers.

The FSAs would become a thing of the past, or at least get renegotiated while the coal market as a whole would largely depend upon short term transactions rather than long term transactions, believes Yogesh Daruka, Partner-Power & Utilities, Mining, PwC.

“We are already seeing many companies pressurising Coal India to rework the terms of their FSAs and make them more evenly balanced,” he said.

There would be more short-termed market-linked transactions on coal after commercial coal is available.

There would be impact on the socioeconomic aspects also as many of the blocks selected are in backward areas of the country.

“Development of such mines would also lead to development of the backward areas of states like Jharkhand, Madhya Pradesh and Osidha,” Nagaraju said.

Nagaraju, Bhattacharyya and Daruka shared their insightful perspectives on the upcoming commercial coal block auction during a recently held webinar conducted by mjunction services ltd.

Need for transparency and viability

While talks of opening up the coal sector was going on for a while, the turning point came when in 2014 the Supreme Court cancelled the allocations made on discretionary basis.

“So the focus of the new government was to create a transparent process. Following this, a process was formulated and auctions were done,” Bhattacharyya said.

But production from captive blocks allocated didn’t yield desired results for couple for reasons.

First, international coal prices were very high and bidders, all captive end users, while looking for energy security, bid somewhat irrationally high prices and later on problem started while implementing the projects.

So, the challenge before the government is not only meeting transparency parameters and also developmental imparatives as the blocks need to be mined.

“With this in mind the government has reviewed earlier policy and has now come up with a framework which is rational and also meets the transparency requirements,” the former Coal India head said.

Need to break duopoly structure

With no major captive miners, there are only two coal miners – Coal India and Singareni Collieries – controlling 94 percent of the supplies.

For a country of this side, the need for more players was felt long back.

The 1993 amendment of the Coal Mines Nationalisation Act was the first step towards increasing the number of players by allowing captive mining.

Captive failure

This experiment of giving blocks to only captive mining didn’t succeed and it was not a very acceptable model anywhere else in the world.

“As captive mining didn’t meet expectations and so the power sector suffered quite a bit as there was a significant gap between demand and supply for a very long time excepting for certain periods when because of extraneous reasons, the gap wasn’t felt,” Bhattacharyya said.

This situation is prevailing now as demand is low, for reasons including the pandemic.

“Of the coal blocks we had auctioned in the past, only about 32 have come into production. We are trying to make the remaining blocks operational,” Nagaraju said.