Coal Insights, May 2020

Contents 18 Seaborne thermal coal offers mostly flat in May 19 Seaborne coking coal offers rise in May 20 CIL’s production down 11% in April 21 India’s March coal imports down 9% y-o-y 22 SCCL’s production plunges 45.5% in April 23 Cabinet approves mine auction methodology 25 CIL starts work on CBM projects at Jharia and Ranigunj 29 Power players see up to 30% drop in demand 31 April sponge iron production down 88.9% on year 32 Power capacity addition in February at 300 MW 33 FY20 cement production down marginally 34 Covid-19 impact: Cheapest solar project gets cloudy 36 Use Covid-19 crisis to revamp mining sector: KPMG 41 Air Products to invest $2 billion in Indonesian coal-to-methanol project 42 US Coal output estimated at 453 MMst in 2020 43 Traffic handled by major ports down 21% in April 44 Can Coal India reach its ambitious target of 710 million tons for FY21?

52 Corporate Update 54 Government Update 56 E-auction data 57 Port data

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6 | COVER STORY

Global post-Covid stimuli banks on coal and power A critical look at India’s effort to revive coal mining and power sector to stage a recovery to shrug off months of inactivity.

16 | INTERVIEW “Most industries will start rethinking on their capex strategies” V Punniyamurthy, mining head, FLSmidth discusses how to face Covid challenges.

27 | Feature Cash crunch and competition: Coal India stares at new normal The end of monopoly as proposed by the government would be the least of Coal India’s troubles.

39 | INTERNATIONAL

Can Indonesia’s coal industry survive Covid-19?

Steep coal price fall impairs cash-flow viability.

47 | EXPERT SPEAK

Opportunities for underground coal gasification KC Jain, retired GM, CMPDI, looks at opportunities for gasification using Carbon Capture Storage/Carbon Capture Utilisation.

Cover Story

Global post-Covid stimuli bank on coal and power Sumit Maitra

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Cover Story

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s economies emerge from lockdowns, nations across the globe have been formulating economic stimulus packages to revive demand, promote industrial activities and trigger trickle down process across various strata of their individual economies.

India, with 350 billion tons of a resource, which is world’s third largest reserve, has focused on coal extraction and mining infrastructure and processes, while announcing its own stimulus package.

It’s not just India. Major energy producing nations like, China, Indonesia and also United States to some extent, are now banking on coal and power sectors to stage a recovery to shrug off months of inactivity.

The thrust on the energy sector to spearhead global economic revival comes at a time when planned investments, particularly by the private sector, in the fuel production capacities are being slashed under pressure from the collapse in demand and prices.

And reluctance to commit fresh capital to new projects could leave cash-constrained governments and companies using existing assets for longer, delaying the speed with which newer technologies are introduced into the system.

“This raises the spectre of an energy system characterised by systematic underinvestment in new technologies and overreliance, instead, on its existing capital stock,” International Energy Agency said.

“Covid-19 is a huge shock to the energy system, but the response also presents an opportunity to steer the energy sector onto a more resilient, secure and sustainable path,” IEA said in its World Energy Investment 2020 report.

Renewable Energy no more cheap

Falling back on fossil-fuel based electric power plants to trigger economic activity comes at a time when the competing Renewable Energy sector has been exposed to be vulnerable to upheavals in a single geography with supply disruptions in China putting an end to the emerging narrative of RE power in India turning much cheaper than coal-fired energy.

Acme Solar, the fastest growing solar power producer in India has just cancelled its contract with the government to supply energy at the lowest tariff of `2.44 invoking the force majeure clause on account of project delays and uncertainty over the current pandemic as imports from China.

“Although investments in coal power are down in many parts of the world, global approvals of new plants in the first quarter of 2020 mainly in China were at twice the rate seen in 2019, and there is a long pipeline of projects under construction,” IEA said.

China’s stimulus package

China has now stepped up fiscal efforts to support its coronavirus-ravaged economy after giving a big push to setting up coal-fired power plants.

China’s National Development and Reform Commission recently announced plans to boost investment in traditional infrastructure projects such as railways and energy efficient ultra-high voltage (UHV) power transmission lines as part of a larger economy wide stimulus package that would see raising $140 billion through issuance of treasury bills and $526 billion in local government bonds.

This follows an earlier package announced in March to set up five thermal power plants with a combined capacity of 7.96 gigawatts.

Public utility, State Grid of China, which accounts for around a third of the electricity investments, announced investments for a total of Yuan 450 billion in 2020 or about $65 billion), with ultra-high voltage (UHV) projects accounting for 40 percent of total investment.

Additional signs of investment expected to increase in some sectors including pumped hydro storage and coal-fired generation.

Research house CRU sees this is as a “good stimulus package” which can put China’s GDP growth rate in 2020 in 2-3 percentage bracket. “The focus on infrastructure spending this year is good news for commodities markets,” said Yingrui Wang, CRU’s economist, said.

US strategy

While US’ stimulus bills passed so far do not include specific support for the energy

“Covid-19 is a huge shock to the energy system, but the response also presents an opportunity to steer the energy sector onto a more resilient, secure and sustainable path.”

International Energy Agency sector, fossil fuel companies including oil, gas and coal are likely to benefit from the $750 billion bond buyback programme.

US companies having a BBB-/Baa3 or higher credit rating from a major credit rating agency as of March 22 would be eligible for the Federal Reserve’s corporate bondbuying programs created as part of the US government’s coronavirus recovery efforts.

According to an analysis by Rainforest Action Network, 90 such bond issuers in the fossil fuel sector and 152 issuers in the utilities sector are eligible under this programme.

There is also loud demand for stimulus for the energy sector including coal in US. “It is vital that our governmental policy does not place undue stress on an industry that will be fighting to rebound as our economy recovers from the Covid-19 pandemic. Coal is still needed to keep the lights on. Coal is still needed to produce the steel necessary for the wheels of our economy to turn,” Virginia Coal and Energy Alliance Chairman J.P. Richardson said during a webinar.

Indonesia law tweak

Indonesia’s House of Representatives this month passed a revised bill for Law No 4 of 2009 on Coal and Mineral Mining Law which aims to promote several fiscal and

Coal Insights, May 2020

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FEATURE

Cabinet approves mine auction methodology Keeps floor price at 4% of revenue

Coal Insights Bureau

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he Cabinet Committee on Economic Affairs, chaired by the Prime Minister has approved the methodology for auction of coal and lignite blocks for sale of coal and lignite on revenue sharing basis and increasing the tenure of coking coal linkage.

This methodology provides that bid parameter will be revenue share.

The bidders would be required to bid for a percentage share of revenue payable to the Government.

The floor price shall be 4 percent of the revenue share, as earlier mentioned in the draft rules though there was a view that it could have been lesser.

“A paradigm shift in the approach from being oriented to maximum revenue from coal to making maximum coal available in the market at the earliest,” an official government release said.

Bids would be accepted in multiples of 0.5 percent of the revenue share till the pepercentage of revenue share is up to 10 percent and thereafter bids would be accepted in multiples of 0.25 percent of the revenue share.

There shall be no restriction on the sale and/or utilization of coal from the coal mine.

“The methodology is oriented to make maximum coal available in the market at the earliest and it also enables adequate competition which will allow discovery of market prices for the blocks and faster development of coal blocks. Higher investment will create direct and indirect employment in coal bearing areas especially in mining sector and will have an impact on economic development of these regions,” the government said in the release.

Successful bidder shall be required to make monthly payments which shall be determined as product of: ♦♦ Percentage of revenue share (final bid) ♦♦ Quantity of coal on which the statutory royalty is payable during the month

Coal Insights, May 2020

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FEATURE

Cash crunch & competition: Coal India stares at new normal E-auction norms to hurt earnings Sumit Maitra

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he end of monopoly as proposed by the government in an ‘Atmanirbhar Bharat’ would be the least of Coal India’s troubles these days.

Besieged by falling demand and impending liberalisation of coal mining sector, country’s near monopoly state-owned entity is faced with a unique problem never imagined in recent memory.

Its cash in hand is being depleted fast due

to an unfavourable cashflow situation due to mounting outstanding from customers, mainly the state-owned power generating companies.

The crisis has reached such a level that Coal India’s top brass is even thinking of short term borrowings to tide over the crisis temporarily.

Depleting cash balance and mounting dues

From `18,000 crore in FY13 to `253 crore in FY19, Coal India’s cash and cash equivalents have been coming down every year and the current year would be tougher with rising receivables.

During a comparable period between FY12 to now, Coal India’s dues from coal sales reportedly rose from `7,400 crore to `17,000 crore.

Coal Insights, May 2020

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FEATURE

Use Covid-19 crisis to revamp mining sector: KPMG Thermal coal demand may fall 7 percent in FY21 Coal Insights Bureau

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ndia should diligently use the great pause imposed by the pandemic to rethink its mining policies and strategy to redirect it towards a path of rapid economic revival in a post-Covid world, says KPMG India in a report.

“The discontinuity caused by Covid-19 provides the opportunity to deal with longstanding problems in the sector and unshackle its development,” Anish De, Partner and head, energy and natural resources, KPMG, said in a report Impact of Covid-19 on the mining sector in India.

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At the core of the recovery process from Covid-19 lies employment and revenue generation for central and state governments.

Mining addresses those needs strongly, hence there is understandable emphasis on opening up the sector, he added.

The report suggests that for the next few months till the pandemic is contained, it will require stakeholders to remain patient, and at the same be time extremely agile with smart actions to prevent the extent of damage to the ‘fundamentals’ of the sector.

During the medium-term phase, governments must focus on setting the house in order through long-standing policy

changes like identification of alternate options for mineral resource distribution and rationalisation of the tax structure. Long term actions should be focused on creating downstream and ancillary ecosystem of business with the backward and forward interlinkages with other industry segments will have to be driven by individual.

Lower mineral revenues to impact government exchequer

As an immediate consequence of this subdued production from mines is fall in revenues from mining sector for the governments.

INTERNATIONAL

Can Indonesia’s coal industry survive Covid-19?

Steep coal price fall impairs cash-flow viability Coal Insights Bureau

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steep fall in coal prices as the Covid-19 pandemic has raised questions about the cash flow viability of six out of 11 listed Indonesian coal producers, finds a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).

The study of the listed producers, examines the issues of cash profit per ton, a break-even coal price, cost control under pandemic conditions, and the risk to government royalty payments at the current coal price of $58 a ton.

“Rapid fall in the Newcastle benchmark prices from $70/ton in January to $58/ton may not be an existential moment for the global coal industry, but it is a hard blow for Indonesia,” says Ghee Peh, an IEEFA financial analyst.

2018 and 2019 were profitable years for Indonesia’s coal producers thanks to steady appreciation of benchmark coal prices.

All companies were operating cashpositive at the benchmark price of $77.9/ton compared with the current spot price of $58/ ton.

But the declines in 2020 were quite sudden and there has been no visibility on floor prices or a time frame for recovery.

“The sudden fall meant that managers were not in a position to proactively cut costs because the fall was not expected, even by as late as February,” IEEFA analyst said.

The study analyzed the 11 companies using five key metrics, and found that Bumi Resources, ABM Investama and Geo Energy Resources would need a benchmark price of $60-62/ton to maintain cash breakeven.

“At current coal prices around $60/ton, and possibly lower, this would raise questions as to how companies with higher costs would find the working capital needed to maintain operations,” says Ghee.

High royalty

Indonesian coal producers’ price problems are compounded by a 13.5 percent royalty that the government collects on coal sales.

Taking royalty payments into account, six of the 11 companies analyzed would be cash flow negative.

At an average benchmark coal price of $58/ton for 2020, companies will face serious problems meeting royalty obligations, and this raises the question of whether the affected companies will seek a royalty moratorium.

“And if one were to be implemented, it’s important to ask whether it will be applied to all companies or only to companies that face a negative cash flow per tonne of coal sold?

If the royalty moratorium is expanded to the whole sector, then $1.26 billion of royalties could be at risk,” the analyst said.

Breakeven problem

If the Newcastle benchmark averages $58/ ton for 2020, IEEFA estimates estimate that there could be as much as $551 million of royalty payments to the Indonesian government at risk in 2020 as the coal mining companies would be operating on a net negative cash per ton basis if they have to pay the 13.5 percent royalty.

The three companies with the lowest cash cushion under a $58/ton benchmark price would be Bumi, ABM and Geo Energy, the report said.

IEEFA calculated the breakeven

“Rapid fall in the Newcastle benchmark prices from $70/ton in January to $58/ton may not be an existential moment for the global coal industry, but it is a hard blow for Indonesia.” Ghee Peh, IEEFA financial analyst benchmark price for each producer, with two key assumptions on prices and on costs.

For prices, it has taken the average discount to the benchmark price for the last two years and applied it to each company.

To ensure clean comparison, it has also maintained the reported 2019 full yearvolumes.

For cash costs, it has assumed a 10 percent on year decline from 2019. Mining costs could follow a fall in diesel prices for equipment and trucks, fewer workers and contractors, and mining of seams with lower strip ratios.

However, mine plans need time to change and execute and there is likely a lag before lower oil prices translate into lower diesel prices.

A 10 percent cost decline is achievable and based on this scenario, for the 11 coal companies in the sample, Bumi, ABM and Geo Energy Resources would require a benchmark coal price of $60-62/ton to maintain cash breakeven.

At current coal prices around $58/ton, and possibly lower, this would raise questions

Coal Insights, May 2020

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Expert Speak

Opportunities for Underground Coal Gasification with CCS/CCU KC Jain

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overnment of India has decided to permit commercial mining of coal for competition, transparency and private participation in the coal sector. This would ensure better availability of coal.

There is emphasis on clean coal technologies like CBM and Coal Gasification for utilizing the coal energy in efficient and environmentally friendly manner. This is also required to ensure the commitments made by our Nation towards meeting the Nationally Determined Contribution (NDC).

Coal gasification can be through Surface Gasification or by Underground Coal Gasification (UCG).

In surface gasification, coal is mined and then converted into synthetic gas (syngas) whereas in UCG the reactor is a natural geological formation containing unmined coal ie in situ. So, UCG is more economical and less polluting.

UCG is a process through which energy from deep-seated coal seams, where mining is not possible due to techno-economic reasons, can be extracted.

Underground Coal Gasification

UCG is a complex physicochemical process involving in situ conversion of coal into combustible gas with the help of free or bound oxygen. The use of UCG can help expand recoverable coal reserves, and the syngas it produces can be used as a fuel or chemical feedstock.

After processing, UCG synthesis gas is applicable for different end-uses as, provision of chemical raw materials, liquid fuels, hydrogen, fertilizers, or electricity.

UCG is a technology that could contribute to future energy needs by exploiting deep coal seams with relatively minor environmental impacts compared with conventional coal technologies.

The technology offers advantages such as preserving the earth’s surface and fertile topsoil. The UCG method is also intrinsically socially beneficial compared with conventional coal mining techniques.

Taking into account the comprehensive domestic coal resources, by implementing UCG, dependency on importing coal can be reduced with a reduction of CO2 emissions, and an increase in energy efficiency.

So, integrated UCG-Carbon Capture Storage/Carbon Capture Utilisation processes may offer approaches to meet all of these criteria in India. The advantage of UCG is that it can extract the maximum energy from the in situ coal and bring it to the surface, but with the flexibility to operate on different gasification agents.

Composition of UCG

It is a well-known chemical process that converts solid carbonaceous material into syngas, which consists predominantly of methane (CH4), carbon monoxide (CO), carbon dioxide (CO2), hydrogen (H2), and water (H2O) steam.

UCG vs surface gasification

UCG is similar to surface gasification with syngas produced through the same chemical reactions.

The main difference is that surface gasification occurs in a manufactured reactor, whereas the reactor for a UCG system is a natural geological formation containing unmined coal. Gasification differs from combustion (or burning) because burning coal takes place in excess of O2 and produces only CO2 and water steam. Whereas in case of UCG burning takes place in controlled condition.

Surface Coal Gasification Plant at Angul in Odisha is operational using Natural Gas based DRI, which is a highly efficient technique of manufacturing sponge iron that creates less environmental impact. It uses high ash coal available in the vicinity of the site and converts it into syngas.

International development

UCG has been an object of research since early 1920s when UK experimented it in Durham. This experiment, however, was not successful and therefore, was discontinued.

The erstwhile USSR initiated research programme in UCG in 1931. By the early 1950s, the Soviets had evolved a successful UCG system.

Angren Project in Uzbekistan(in operation) Angren Power Station is still operating in Uzbekistan since 1961. Today, there is only one station, Angren in Uzbekistan still operated by Yerostigaz, a subsidiary of Linc Energy.

This project has been continuously producing UCG syngas for a local electric power station for more than 40 years.

Chinchilla Pilot Project, Queensland, Australia.

Australia has successfully demonstrated UCG project at Chinchilla showing continuous and stable gas production in full compliance with environmental guidelines, industrial and health safety regulations from gas production.

It was started in December 1999, and the plant operated continuously until April 2002. The project site involved the development of coal seam of 10 m thick at a depth of 120 m.

Coal Insights, May 2020

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58 Coal Insights, May 2020

Tear along the dotted line

Tear along the dotted line