Coal Insights, October 2015

Contents

6 | COVER STORY

14 “Coal imports of 175-225 mt a must for price competitiveness” 18 “Expect some recovery in coal prices by end of 2016”

“Everybody under-estimated China’s cut”

26 Demand slowdown continues to impact steam coal offers in October

International coal prices may see a slow recovery from late 2016, experts say.

28 Coking coal offers decline further in October 30 India’s Apr-Aug coal output at 33% of annual target 34 Low hanging cherries will vanish: Bhattacharya 36 High OB removal, tweak in EC norm helping CIL record growth 40 SCCL plans to tread cautiously on overseas acquisitions

47 | Special Feature

JSW plans SPV to develop Jharia coking coal mines The proposal needs an investment of `7,20010,000 crore, says Seshagiri Rao.

50 | Government

42 Coal stocks at power plants dip below 25 mt level 43 India’s cement output slide continues in August

Coal price rationalisation may raise price of power

44 Availability of coal and iron ore at right price holds the key for DRI 45 Indian pet coke market at crossroads postgasification 48 Met coal, coke prices have scope to come down by 10% 54 Tact key to managing people 56 “For us, largest market is thousands of existing conveyors in India” 59 Corporate update 61 US power sector coal consumption to fall 8% 62 Can coal and nuclear go hand-in-hand in Japan?

This is an option for the future, cannot be implemented now, government sources say.

52 | Expert Speak

History of coal mining in India Mining veteran V K Arora puts in writing the exciting journey of India’s coal industry through ages.

70 | Logistics

68 Coastal shipping trigger has to come from plants themselves

Railway’s coal freight capacity to reach 800 mt by FY20

72 Thermal coal handling by major ports up 19% in Apr-Sept

Rakes allocation needs to grow by 180 per day to carry the additional coal freight.

4 Coal Insights, October 2015

Cover Story

India assuming key role in global coal trade

“Everybody under-estimated China’s cut”

F

or the last couple of years, the everyday question in the international coal fraternity has been: ‘how low is too low? Words like ‘record lows’ and ‘rock-bottom’ have become frequent in market reports covering international coal price movement. News of coal miners across the countries shutting down operations and selling assets at cheap valuations has been all too common. So, where is the end of this price trough? Will there be a tightening in the market in the short term? Or, is the low price regime here to stay?

Coal Insights caught some of the experts on the global coal markets to get a ringside view of what could be expected of the market, going forward. How are the prices likely to play out in the next 1-2 years? Is there any recovery on the way? Their views point to varied possibilities.

Possibilities…yes…because no one possibly dares to ‘predict’ or ‘forecast’ the behaviour of coal prices, not any more.

6 Coal Insights, October 2015

Cover Story

W

hen China announced its plan to cut down on its use of coal, the global coal market did not take it very seriously, considering the country’s gross dependence on the dry fuel. That was an oversight, says Howard Gatiss, CEO, Coal Marketing Company Ltd1 (CMC), exclusive marketer of Cerrejon, the largest producer and exporter of coal in Colombia.

An oversight which explains why the international market did not behave the way most reputable consulting firms forecast it would.

As it appears now, Gatiss tells Arindam Bandyopadhyay and Tamajit Pain of Coal Insights, the tightening of the market would be postponed to 2016. He, however, refrains from making a forecast on prices as it would depend on many factors. But, certainly, there is little hope to see a recovery in the next one year, he implies.

Excerpts: The global steam coal market was grossly oversupplied till last year. It was expected that it could tighten a bit in 2015. But, as China continues to be in withdrawal mode and India accelerates domestic production (also, the government aims to stop imports in 2-3 years), it seems the oversupply is here to stay. What is your view on the demandsupply mismatch and short-to-mid-term outlook?

Yes, you are right in saying there was an expectation in the market that in the second half of 2015, supply and demand would come back more or less into balance. I don’t think anybody expected a sharp correction but definitely people expected a slight reduction in supply and marginal increase in demand in a number of countries.

Now, why that expectation was not fulfilled? Actually, most of us underestimated what’s happening in China.

CMC is is owned in equal parts (33.3% each)

by BHP Billiton, Glencore and Anglo American.

1

There was also some reduction in supply from Indonesia, which I think was the worst affected by China’s loss of appetite. But then, Indonesian statistics are not very clear. Also, the reduction in Indonesian supply was not in sync with the reduction in Chinese demand. We hope to see a clearer picture emerge next year.

Chinese imports have gone down sharply.

There is some growth in one or two other countries but not enough to counterbalance the reduction in other. That is on the demand side. As for the supply side, there have been very few cuts. The only country that saw a significant decline in supply is the US. But that has had almost no effect on the international coal market because the US is a small player in seaborne coal trade.

There was also some reduction in supply from Indonesia, which I think was the worst affected by China’s loss of appetite.

But then, Indonesian statistics are not very clear. Also, the reduction in Indonesian supply was not in sync with the reduction in Chinese demand. We hope to see a clearer picture emerge next year .

As it stands now, I do expect a mild tightening of the market from 2016 onwards. This is mainly because some new projects, particularly in Australia, have been cancelled or slowed down. Also, there is an expectation that demand may grow in countries like South Korea, Turkey, Chile and India. So, it is the positive growth in demand and a flat growth in supply that may bring some stability this year and a little tightening from next year.

What is your outlook on steam coal prices?

There are so many factors which influence

coal prices over and above the demand and supply dynamics of the commodity in the international market. These include oil prices, gas prices, electricity price and the regulatory environment in Europe and shale gas prices in the US, for example. It is a combination of all these factors that determine the coal price movement. If the combined effects of all these factors are not favourable then supply and demand may balance at levels where prices are not much different from what we are witnessing now.

However, if there is a recovery in other commodities such as an increase in oil or gas prices, then a narrowing of the supplydemand gap may bring about a recovery in coal prices as well.

That said, I must point out that making a forecast on coal prices is very difficult and lot of projections by reputable consulting firms over the past two years have gone haywire.

Don’t you think a recovery in coal prices is necessary for many coal miners across the globe to continue their operations?

It’s not clear exactly what percentage of thermal coal production and export is loss-making at the moment. I’m not saying that if a mine incurs cash loss, the miners should close down operations the next day, but I guess a significant percentage of mines

Coal Insights, October 2015

7

Interview

“Coal imports of 175225 mt a must for price competitiveness�

What is the outlook like for thermal coal in the global markets?

For thermal coal, the only support that is coming to the market is from the Indian demand. Lot of capacity was added, the mines were opened on the expectation that the China economy will keep growing at 8-9 percent, as it was doing. But, suddenly there was a big slowdown in the Chinese economy and the expectations that this country would import 100 mt of coal, with globally players opening up mines to feed this prospective demand evaporated.

This year, we expect that India will become the largest importer of coal, surpassing China. Domestic coal production within China has increased and the capacity to even increase coal production is there. There is a renewables push. So, domestically, China is well-supplied. The small volume that China will be importing is only because of the price arbitrage in the coastal areas. China, right now, does not need to import coal.

Do you think prices will slide further?

Yes, there is a possibility. It is very hard to make a prediction, but, yes, there is more of a probability for prices to go down. There is no upside or reason visible in the medium term that will give support to global coal prices.

It is hard to say, where prices could reach. At present, taking a reference to the API or Richards Bay price index, it is below $50 per metric ton. The trend is that prices can go further down before they start looking up, or at best, stay stable. For sure, however, we will not see any price increase in the global coal markets.

T

here are no upsides to indicate that global coal prices will remain firm or increase in the short to medium term. But India needs to keep its import volumes within the 175-225 million tons range to retain price competitiveness. While there should be a stress on increasing domestic production, pitheads power plants should be allowed to use imported coal for greater price viability. Importantly, while solar is fine, its contribution to the grid must not be beyond a certain level, otherwise this will inject inefficiencies into the system, Mayank Garg, Managing Director, Venerable Energy Solutions, tells Arindam Bandhopadhyaya & Madhumita Mookerji of Coal Insights.

14 Coal Insights, October 2015

What about India’s coal imports? We are harping on increasing domestic coal production. But, at the same time, our coal imports are also increasing in tandem?

We should not be so concerned about the volume of coal imports into India. What we should be concerned about is making the best effort to increase coal production within India. But, if a cheaper variety is available in the market let Indian buyers buy it . For instance, imported coal is more price competitive for the coastal power plants than domestic coal. That coastal power plant has to import coal to blend with the high-ash, low calorific value domestic coal, which it has to transport for thousands of kilometres, and create an extra burden on the railways in the process. And then making that coal fit into its scheme of things. But buying imported coal makes more sense for these power producers on the coast, since the imported variety is more pricecompetitive. So, they should be allowed to buy imported coal.

I repeat, we need to be concerned about increasing domestic coal production.

FEATURE

Focus on UG a priority

Low hanging cherries will vanish: Bhattacharya Coal Insights Bureau

C

oal India Ltd (CIL) will have to focus on increasing its underground (UG) production for coming years as “low hanging cherries” (opencast production) will disappear in future, company chairman-cummanaging director Sutirtha Bhattacharya said.

“Low hanging cherries will, as low hanging cherries do, disappear in future!”

Bhattacharya said, while addressing the 9th Indian Coal Markets Conference, organised

34 Coal Insights, October 2015

by mjunction services limited, on October 12-13, in Kolkata.

CIL’s UG production has declined sharply over the last decade and dropped from 40 million tons (mt) in 2010-11 to around 37.87 mt in 2014-15. The arguments behind the declining trend are the higher cost attached to UG mining and poor coal seams found in India. However, with the gradual depletion of opencast (OC) resources, the company has planned to augment its UG output to 100 mt over the next 10 years.

Bhattacharya said that CIL enjoys the advantage of a “positive legacy” of having low cost mining operations which would help maintain its competitiveness in the face of future competition (from private commercial miners).

He also stressed on CIL’s “quest for quantity with quality” of coal it supplies, stating that coal washing is high on its list of priorities. He further said that with higher production, CIL would go for offering more linkages for power plants but only after they come up with power purchase agreements (PPAs).

Bhattacharya further said that CIL is planning to set up a national coal load despatch centre to improve and monitor its coal off-take to customers almost on a real time basis.

“Our plan is to create a national coal load despatch centre whereby every single despatch of coal can be tracked individually,” he said, adding that the miner is focusing on

EXPERT SPEAK

History of coal mining in India - Part II V K Arora

T

he last c h ron i c l e (published in September issue) ended at the time of Lord Linlithgow’s visit to Jharia Coalfields in 1940 where he inspected Kusunda fire and the sand blanketing operations carried out by the stowing Board to contain it. I was also born in the same year and little did I realise when I was studying mining in Dhanbad that the fire was as old as me. It is ironic, that active fire still continues to burn the best grades of coking coal, after 75 years and me after having outlived the phase of active mining, can do no better than to record it.

Coal industry was put under the Colliery Control Order 1944 under which for the first time coal prices were fixed grade wise.

Railways were asked to draw supplies from the collieries according to a pre-determined percentage of their production. In 1947, the entire wage structure of the industry was revised by the Conciliation Board Award which resulted in the introduction of new wages and new prices. Grade wise price of steam coal and rubble was increased by `3-80 per tonne effective from July 9, 1947. The rate of soft coke was increased from `17–22 per tonne, price for hard coke was fixed at `34 for Grade 1 and `28 for Grade 2. This increase of price by `3 to `5 was considered a big achievement for the industry.

Three things happened in December 1947: a) Introduction of fixed price according to the grade b) Distribution of Railway and Government Orders to the entire industry on the basis of proportionate production of each Unit.

Your esteem went up a notch, if you were supplying coal to Railways.

52 Coal Insights, October 2015

c) Introduction of a complete structural change with substantial increase in the rate of wages and Award of other cash earning facilities such as PF and bonus.

The output rose to 36.8 million tons (mt) in 1952. Government had one more Wage Board Award in 1956 resulting in substantial increase in wages of workmen and other categories. A target of 60 mt was given in the Second Plan period. The price of coal was revised again in August 1959 whereby a flat increase of As/8 per ton was given in January 1960.

While the production was increasing, availability of wagons were a perennial constraint.

A Coal Commissioners Organisation for controlling the movement of wagons was established. The Commissioner’s office became very strong and anyone wanting to have wagons/movement of coal had to compulsorily use all kinds of influence.

In 1962, a scheme for grading of coking coal into 12 grades designated by letters A, B, C, D, E, F, G, H, HH, J, K, L was introduced.

Simultaneously, with the new grades, new prices were also announced.

Coal industry during the Second Plan period from 1956 to 1961

It was only during the Second Plan a serious thought was given to coal and a production target of 60 mt was fixed to be achieved by March, 1961, of which 43.50

mt was allocated to the private sector and 16.50 mt to the public sector. Inspite of the restrictions imposed under the Industrial Policy Resolution of 1956 on the working of the private sector collieries only to the existing and immediately contiguous areas and inspite of the bottlenecks of transport, shortage of explosives, iron and steel and acute shortage of spares of mining machinery and equipment, the private sector collieries exceeded the target and produced as much as 45.05 mt and the N.C.D.C. and Singareni collieries 10.67 mt totaling a production of 55.72 mt. Fortunately, the shortfall which occurred in the public sector by about 6 mt perhaps saved the coal industry from the initial glut, which would have otherwise occurred if the production target of 60 mt was achieved. State sector’s failure to produce saved the day for the rest of them.

Mr K D Malaviya, while he was the Minister of Mines, complimented the private sector for their record performance in the Second Plan and made the following statement in April, 1963 in the Lok Sabha during the debate on demands for grants in respect of his Ministry :“With regard to the National Coal Development Corporation which has been another subject – matter of criticism, it is said that the private sector in the Coal Industry has gone ahead and its work is much more satisfactory than that of the Public Sector. Yes, it is a fact that the private sector coal industry

78 Coal Insights, October 2015

Tear along the dotted line

Tear along the dotted line