Coal Insights, November 2016

Contents 23 ‘There is a need to write out balanced MDO contracts’ 25 Rise in steam coal offers ebb in November 26 Coking coal offers continue surge in November 29 India’s September coal imports down 9% y-o-y 30 Coal India’s production growth flat till October 36 Cement companies are in expansion mode 36 India’s Q2 cement production up 4.52% y-o-y 37 India does not add new generation capacity in October 39 Imported pet coke prices continue firm trend on restricted supply 39 Reliance achieves mechanical completion of its gasifiers 40 NLC to double lignite mining capacity 41 Tangshan Shenzhou set to enter India 42 Corporate update 47 65 Indian mining blocks ready for auction: Mines secy 48 Coal India considering exporting coal to Bangladesh 49 Susheel Kumar new coal secretary 50 Coastal shipping cost study by January 2017 52 Eastern Railways trying hard to improve coal loading 55 Oct coal handling by major ports up 11.12% m-o-m 56 Indian Railways’ H1 coal handling dips 4% y-o-y

4 Coal Insights, November 2016

6 | COVER STORY

Knocking on the MDO’s door!

A `15,000 crore market is up for grabs for the mine developer-cum-operator industry.

18 | Interview

‘MDOs with financial strength & tech expertise need of the hour’ Only 2-3 MDOs qualify these criteria, says Rajesh Agrawal of Adani Mining.

27 | Feature

SCCL puts on hold its global ambitions Instead, the miner increases its domestic production target to 90 mn tons by 2020.

34 | Feature

Demonetisation affects coal, cement, steel trade Auction, trading and transportation services worst hit as the market suffers from lack of liquidity.

44 | Expert Speak

CIL’s production shortfall may touch 40 mt this fiscal This, added to the drop in captive output, will result in a significant shortfall.

Cover Story

A `15,000 crore market up for grabs

Knocking on the MDO’s door!

Rakesh Dubey & Arindam Bandyopadhyay

6 Coal Insights, November 2016

Cover Story

C

oncerned over the fate of the auctioned captive blocks? Worried over losing competitiveness?

Harried by the prolonged slackness in demand? Not any more… if you can find a good mine developer-cum-operator (MDO) to take care of your block. An analysis by Coal Insights reveals a huge market of no less than `15,000 crore awaiting MDOs worth their mineral. The good news is that this market, if tapped adequately, would also help India Inc save more than `6,000 crore on its coal costs. And there is something for the end-users too…!

This is a conservative estimate. But, alas, MDOs in India’s coal and mining industry seem to be as ill-equipped as the block allottees are, in tapping this $2-billion opportunity, as Coal Insights finds out.

A zero sum game?

John von Neumann did not have the Indian mining sector in mind when he published his paper on zero-sum game (1938) which later evolved as the famous game theory which postulates that an individual’s gain or loss in a group is exactly equal to the total loss or gain registered by other participants. Neither did the Indian government have the game theory in mind when it rejoiced the high bids placed by potential mine allottees in the captive block auction last year.

As time rolls by, and the more it rolls, it becomes clearer that the stakeholders – and that include the block allottees, government and the consumers – are but those participants of the zero sum game.

This may be illustrated through a

simplistic model, where the industry is made to pay a high price to the government for minerals, and the increased cost is passed on to the consumers, who are then to be subsidised by the government, in one form or the other.

Leaving aside the economic implications, there has been another casualty in the form of a dramatic fall in captive coal production this year. As per the latest data available, only 11 blocks (of the 33 auctioned) have started operations so far. Compare this to the production of 40 million tons (mt) by 42 mines (Schedule II blocks) that were operational before the Supreme Court deallocated all the blocks and auction was held for their re-allocation.

The majority of the blocks yet to start production are either facing litigations or are found unviable by the new allottees who

Details of currently operational mines* Sl No

Specified End Use

Name of Mine/Block

Successful Bidder

Schedule

1

Non-Regulated Sector

Belgaon

Sunflag Iron and Steel Co. Ltd

II

2

Non-Regulated Sector

Bicharpur

UltraTech Cement Ltd

II

3

Non-Regulated Sector

Chotia

Bharat Aluminium Co. Ltd

II

4

Non-Regulated Sector

Gare Palma IV-4

Hindalco Industries Ltd

II

5

Non-Regulated Sector

Gare Palma IV-5

Hindalco Industries Ltd

II

6

Non-Regulated Sector

Mandla North

Jaiprakash Associates Ltd

II

7

Non-Regulated Sector

Sial Ghoghri

Reliance Cement Co Pvt Ltd

II

8

Non-Regulated Sector

Manda-South

Jaypee Cement Corp Ltd

III

9

Power

Amelia North

Jaiprakash Power Ventures Ltd

II

10

Power

Sarisatolli

CESC Ltd

II

11

Power

Talabira-I

GMR Chhattisgarh Energy Ltd

II

* For details on block allocation to PSUs see annexure on Pg 57

bid too high for their own comfort. For the latter segment, industry experts express doubt if those blocks would ever be mined and if there would be another round of deallocation in future.

However, standing at the present juncture and looking to the future, it appears that there could be a way out to beat the zero sum game, by successfully inducting a new agent in the loop, ie, the MDOs, who could be a gamechanger for all the stakeholders concerned.

In fact, a successful MDO model could not only bring immense gains for themselves, but also for the allottees and consumers alike.

MDOs pre- and post-auction

MDOs, said a coal industry veteran, are not a new concept in the Indian mining sector, though the model under which they operate might have undergone significant changes.

The changes, he said, have precisely occurred post de-allocation of blocks a couple of years back.

“It is not for the first time that anyone is going to outsource mining activities. I think contract mining in coal has been existing for the last almost 30-40 years in different forms.

Earlier, somebody was removing overburden (OB), somebody extracting coal, while some other was pumping out water and yet another party was taking the responsibility of transporting that coal. Now when you structure it in a manner where all these activities come under one single contract, then you say that it is the MDO model. Here, the mine owner or allottee only monitors the contract and pays at a rate mutually

Coal Insights, November 2016

7

Interview

‘MDOs with financial strength & technical expertise need of the hour’

G

overnment-run power entities, because they do not have the technical expertise for developing a coal block, are increasingly opting for the mine developer-cum-operator (MDO) route while private players, who are lagging behind due to the slowing down for power demand in the country, prefer appointment of pure mining contractors rather than engage MDO as they are willing to take the technical and financial risks associated with development of coal blocks, Rajesh Agrawal, Chief Commercial Officer, Adani Mining, and an MBA from Pune University and B. Tech from IIT, Mumbai, with a wide exposure in sectors like mines, infrastructure, steel and power, tells Rakesh Dubey.

Excerpts:

What role is being played by MDOs in shaping India’s growth prospects?

Currently our GDP is growing at more than 7 percent and it is expected that it may grow at 8 percent in the next 10 years.

Accordingly, the country’s power demand is going to increase substantially. Coalbased power plants shall play a major role in catering to the increased demand.

It is observed that many of the companies, especially PSUs to whom coal blocks have been allocated, don’t have the requisite technical expertise to develop and operate the coal mines. The work involves complex activities like land acquisition, R&R, grant of various approvals like environment and forest clearances etc which have to be obtained from the state governments as well as the Centre.

18 Coal Insights, November 2016

Coal block development involves considerable technical and financial risks which government coal block allocatees can mitigate by engaging technically experienced MDOs with sound financials.

An experienced MDO also plays a major role in fast-tracking the development of these projects and to ensure production of coal at an optimum level to meet the fuel requirement of the country and keep the supply at par with demand.

How many MDOs might be presently operating in India? Do you see more contract miners graduating to become MDO’s?

The job of a MDO is a specialised one.

Currently, in India, there are only 2-3

MDOs who have the requisite financial and technical strengths.

The scope of mining contractors mostly engaged by Coal India Ltd. (CIL) subsidiaries is limited to overburden removal and coal excavation only. Whereas MDO contracts scope is very wide and includes the whole basket of activities from the application for grant of various approvals/clearances’, including legislative requirements and compliance thereof during operation, preparation of GR/ mining plan, land acquisition, R&R, CSR, overburden removal, coal excavation, project construction and operation of coal handling and beneficiation plants, reject handlings, coal transportation related to road and rail infrastructure and operation, rake allotment, rehabilitation of land and mine closure.

Interview

‘There is a need to write out balanced MDO contracts’

T

hriveni Earthmovers, along with Sainik Mining, is the mine developer-cum-operator (MDO) appointed by NTPC for its Pakri Barwadi project in Jharkhand. While there is immense scope for the MDO players to increase business in India, Thriveni feels that there are certain areas that the government needs to take a look at. These include creating a uniform MDO contractual framework for PSU contracts; inclusion of a legal framework that allows for a win-win arrangement between the mining lessee and MDO and a simplification of the environmental processes so that the objective of protecting the environment is met without unnecessary delays that lead to cost escalation. Also, the scope of the MDO’s work should be end-toend so that the specialised knowledge can be put to efficient use. Furthermore, the MDO business will remain buoyant as long as the stakeholders believe in the principles of division of labour, specialisation and equitable sharing of profits, P K Misra, Director (Technical), Thriveni Earthmovers (former Director (Operations & Projects) at Vizag Steel Plant of RINL, tells Coal Insights.

What is your outlook on the prospects of the MDO business in India, particularly in a scenario where captive coal block winners are not interested in starting coal mining because their bidding price was much higher?

The MDO business will remain buoyant as long as the stakeholders believe in the principles of division of labour, specialisation and equitable sharing of profits. Specialised MDOs can deploy large equipment, use the latest technologies and focus on sustainable mining, while the mine-owner can continue to focus on its core business. Just like specialised EPC companies will continue to have good market opportunities, a cost and efficiency-focused MDO too will be in demand by value-seeking customers.

A lot has been done by the government over the past few years to popularise the MDO route in India. Do you think more can be done by the government at a policy level to give a fillip to this segment?

In fact, to increase employment and mineral production, the government needs to

encourage the MDO route in all minerals.

A few things that the government can possibly do are: ♦♦ Create a legal framework that allows win-win arrangement between the mining lessee and MDO. The MCR 2016 is a great step forward, but it has a regressive regime where it disallows revenue sharing contracts between the lessee and the MDO. Revenue sharing is a well-established principle in all infra sectors like highways, airports, seaports, etc. Denying it in mining is perceived to be against the ease of doing business objectives that the government is promoting. ♦♦ Create a uniform MDO contractual framework for PSU contracts. Today there are MDO contracts for iron ore and coal and, in future, there will be contracts for other minerals too. Some contracts are very well written out, while many others are practically un-bankable.

This is typical for a new industry.

Therefore, it would be nice if industry and government sit together and create a

Project timeline October 2004 – Pakri Barwadih block allocated to NTPC November 2010 – NTPC appoints Thiess Minecs India as MDO for 27 years May 2014 – NTPC cancels contract with Thiess July 2015 – NTPC finalises new tender September-November, 2015 – Thriveni Sainik Mining Pvt Ltd (TSMPL), a JV of Thriveni Earthmovers and Sainik Mining, wins contract March 2016 – TSMPL does first box cut May 17, 2016 – TSMPL commences OB removal August 2016 – TSMPL achieves 150,000 cubic metres of OBR December 2016 – Expected date for commencement of coal production

Coal Insights, November 2016

23

FEATURE

SCCL puts on hold its global ambitions Arindam Bandyopadhyay

I

n view of the subdued demand for coal in the country, Singareni Collieries Company Ltd (SCCL) has put on hold its plan to acquire overseas mines through proposed joint ventures, a top company official told Coal Insights.

“We are putting on hold the proposal.

There were some parties who showed interest in our proposal, but we are not going for it now,” B Ramesh Kumar, Director (Planning & Projects), SCCL, said.

He said that the current demand scenario in India is not conducive to an expansion overseas.

SCCL, which had clocked an impressive 15 percent growth in coal production in 2015-17, has witnessed poor off-take by the power sector in recent months which resulted in a 4 percent decline in output during AprilOctober, 2016.

Earlier, in late 2015, the Indian miner had planned to secure its thermal coal requirements by acquiring coal assets abroad by forming joint ventures (through equity stakes) with foreign coal mining companies, or by “any other acceptable means”.

SCCL had received 15 offers from six countries – Indonesia, Australia, South Africa, Mozambique, Botswana, Namibia and the US – and had planned to shortlist a few of them.

While the expansion overseas has been put on hold, the company has increased its production target from its domestic operations. Notwithstanding the negative growth in production this year, SCCL has scaled up its coal production target to more than 90 million tons (mt) by 2020.

“As per our current plan, we are targeting to reach the level of 90-100 mt by 2020,” Kumar said.

The company had earlier set a target to reach 80 mt of production by the turn of the decade.

Kumar said the company has drawn up a plan to increase its production further through greater focus on underground mining, deployment of more longwall equipment and by bringing to production its Naini coal block in Odisha for which a mine developer-cum-operator (MDO) will be appointed soon. The company has aimed to start production from the Odisha block within a period of 36 months from the start of the project.

Coal Insights, November 2016

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62 Coal Insights, November 2016

Tear along the dotted line

Tear along the dotted line