Coal Insights, October 2019

Contents

6 | COVER STORY

14 Thermal coal offers rise in October 16 Seaborne coking coal offers slid in October

Global coal trade: All eyes on India as domestic production drops

18 India’s August coal imports down 7% y-o-y 19 CIL’s coal production down 6% till September

Major coal exporting countries are hoping for Indian imports to absorb a large share global seaborne trade

20 SCCL’s Sept coal production up 7% in H1 21 Global solar PV market set for spectacular growth by 2024: IEA 25 Commercial mine auction likely in December 28 Replacing coal saves billions of gallons of water, study shows 29 Coal contractor market to grow four-fold by 2030: KPMG 30 SECL to increase evacuation by 100 mt via Kharsia-Korba link

22 | Feature India may miss 2022 renewable energy target on waning interest Sector seeing poor response from developers as 26% of 64GW of projects receiving little interest

31 India September sponge iron production up 5.1% y-o-y

27 | Corporate

32 Power capacity addition during August at 660 MW

Coal India to miss FY20 production guidance by 55-75 mt: ICRA

33 India’s cement production down 5% in August

Higher domestic prices expected with e-auction premium rising

36 Traffic handled by major ports up 1.5% till Sept 37 Indian Railways’ coal handling in Sept down 11% y-o-y 38 Corporate Update

41 | International

44 Aussie RE boom bad news for thermal energy, Rystad

Coal prices to remain weak on China demand concern

45 US coal production estimated at 328 MMst in H2 of 2019

Aussie government’s resource quarterly report sees drop in Newcastle benchmark

50 Way-forward in achieving coal-quality conformance 52 India’s tryst with growth-hope for recovery 54 Government update 56 Event: IME 2019 62 E-auction data 64 Port data

4 Coal Insights, October 2019

48 | INTERnational

Problems and prospects of coal mining industry in India Lokesh Ray, former CEO of Joy Mining Services looks back at the origin of country’s coal sector in Part 1 of the series

Cover Story

Global coal trade ALL EYES ON INDIA Sumit Maitra

W

ith renewables continuing to thrive world over, the global coal market is showing signs of a gradual slowdown in years to come. Global thermal coal imports in 2018 grew by 4.6 percent to 1.12 billion tons but this year global trade is likely to be slightly downwards, several industry watchers and associations have predicted.

Many reputed forecasters and authorities such as the IEA, CRU and IHS are indicating

6 Coal Insights, October 2019

that thermal coal supply is not expected to grow over the next 5 to 10 years.

From 2018 to 2023, demand is forecast to grow in Asia (excluding China) and decrease in Europe and China.

As such, all eyes are on the Indian market‌!

While imports from developed countries are on a decline as their governments execute phase out plans for coal-fired power

generation, China’s imports are forecast to moderate, as domestic production continues to grow, and as the impacts of various government policies take effect.

In contrast, emerging Asian nations are expanding their coal-fueled power generation and have seen stronger-thanexpected import growth. The overall net result of these divergent trends is a marginal decline in imports out to 2021.

Cover Story The major coal exporting countries are now keenly watching the Indian market with expectations that the recent troubles in Indian coal mining mostly because of Coal India’s difficulty in keeping up with production targets due to factors like flooding and the steady fall in international prices, factors which should ideally promote imports.

“The recent problems in the Indian coal industry, in particular disruptions caused by flooding, has been driving increased interest in imported material,” says global energy consultant Perret Associates.

In the first half of the current fiscal (2019-20), Coal India’s production declined by 6 percent year-on-year (y-o-y) against a growth of 7 percent achieved in 2018-19 (FY19).

“Consequently, imports by the nonregulated sector are expected to remain elevated for the remainder of the year as well, and overall thermal coal imports are expected to cross the 200 million tons (mt) mark in FY201,” said rating agency ICRA in a research report.

India a key player in global trade

“India is one of the great hopes for thermal coal exporters, but also presents a number of challenges,” said the Australian Chief Economist in its Coal in India 2019 report that examines the future of thermal coal in India.

The comment of the Australian government’s office has created quite a stir among various players who have a stake in coal trade or in the future of the fossil fuel in general.

Indonesia has been the primary source of thermal coal imports for India, driven by two key factors. The similar properties of Indonesian and Indian coal makes it easy to substitute Indonesian coal into India’s coalfired power generation fleet, which has largely been designed for low-energy, high-ash coal.

The relatively low cost of Indonesian coal is also appealing to Indian buyers, who are relatively price sensitive.

But with global trade relations being subjected to rebalancing at a time when global coal prices have continuously fall, Australia is now also eyeing opportunities in the Indian market.

“In the short-term, imports are likely to remain high, as domestic output falls short

of usage. In the longer term, there are more uncertainties. It is possible to imagine a scenario where India’s imports lift rapidly on the back of strong growth in energy demand, challenges integrating renewable generation into the electricity grid, and barriers to increasing domestic coal production,” the report states but adds that it is also possible to see a scenario where imports fall, due to lower than expected energy demand, the rapid reduction of barriers to higher domestic coal output, and a faster than expected uptake of renewables.

“India is the world’s second largest importer of thermal coal, and has the potential to be an ongoing source of demand growth — a bright light for thermal coal exporters confronted with falling demand in Europe, North America and North East Asia. But while India is one of the great hopes for thermal coal exporters (alongside Southeast Asia), it also presents significant risk,” the report authored by the office of the chief economist, department of industry in Australia said adding that India’s future energy needs are difficult to understate.

If India’s thermal coal imports decline, there could be substantial implications for seaborne markets, it added.

The report finds that thermal coal consumption is likely to continue to increase next decade, and possibly beyond, in order to meet India’s increasing energy requirements.

However, in the longer term, coal demand will depend heavily on the pace of expansion in renewable generation in India.

Another key factor will be the pace of growth in Indian coal production. India has ambitious targets, but faces challenges in its coal sector around approvals, land acquisition, productivity, transport and pricing.

Not just the Australian government, several major coal miners and exporters are also voicing similar outlook.

Whitehaven Coal of Australia, which usually serves markets of Japan, Korea and Taiwan, also plans to “take advantage of the substantial growth in coal-fired power generation in Southeast Asia.”

Eyeing a market of 175GW in 2040 as estimated by IEA, requiring at least 220 mt of coal each year by that time, more than Australia’s total thermal coal exports in 2018 of 208 mt, Whitehaven is now looking at India.

“Indeed, it is worth pausing to reflect on

the market opportunities in India, which this year accounted for 40 percent of our total metallurgical coal sales. Australia supplies more than 70 percent of India’s metallurgical coal, and according to the Commonwealth Office of the Chief Economist, demand for this coal could increase by one-third between 2015 and 2035 as India’s economy develops.

Whitehaven is positively differentiated from a number of our key competitors, increasing our total production at a time of ongoing tightness in the higher energy-content coal market and given the relative scarcity of metallurgical coal globally,” the company recently told its investors.

India energy imports

“In 2018-19, total import of crude oil, LNG and coking coal stood at $7.2 billion. In the current fiscal year 2019-20, this may go up to $10 billion,” Pradhan said at USIndia Strategic Partnership Forum’s Annual Leadership Summit.

India’s energy profile largely centres around two major sources -- coal (58 percent) and hydrocarbons (35 percent). At a brisk 5 percent annual growth in energy consumption, India’s import dependence remains high - 22 percent for coal, 83 percent for crude oil and 45 percent for gas.

Rise of Asia

India’s appetite for energy largely reflects what’s happening in Asia.

The profound shift in energy consumption to Asia is felt across all fuels and technologies, as well as in energy investment, International Energy Agency said in its 2018 Energy Outlook Report.

“Asia makes up half of global growth in natural gas, 60 percent of the rise in wind and solar PV, more than 80 percent of the increase in oil, and more than 100 percent of the growth in coal and nuclear. Fifteen years ago, European companies dominated the list of the world’s top power companies, measured by installed capacity; now six of the top-ten are Chinese utilities,” the report said.

As recently as year 2000, Europe and North America accounted for more than 40 percent of global energy demand and developing economies in Asia for around 20 percent.

By 2040, this situation is completely reversed, predicts IEA.

Coal Insights, October 2019

7

FEATURE

India may miss 2022 renewable energy target on waning interest

Coal Insights Bureau

T

he country might fail significantly in meeting the 175GigaWatt target set for 2022 considering current trend in capacity additions and poor interest among project developers in taking up future projects.

The installed capacity in renewable energy could rise by just 40GW to 104GW

by FY22 from 64.4 GW in FY19, 42 percent short of the government’s target of 175GW because of policy uncertainty and tariff glitches.

“The sector has witnessed a material waning of developer interest last fiscal. A sizeable 26 percent of the 64GW of projects that were auctioned by the Centre and states received no or lukewarm bids, and another 31 percent faced delays in allocation after being tendered,” says a report by rating agency Crisil.

While allocation of projects have slowed down, both undersubscriptions and

cancellations of awarded tenders have also increased.

As a result, the ratio of auctioned or awarded projects to tendered projects plunged to 34 percent in FY19 from 77 percent over FY16 and FY17.

“The overall tendering of solar PV projects has slowed down with the solar capacity addition in six months of FY20 remaining subdued at 2.9GW,” another rating agency ICRA said in its report.

The slowdown in capacity addition has already slowed down with just 6.5GW being added in FY19 against 9.4 GW in FY18.

“On a calendar year basis, the overall tendering action is lower by 28 percent in nine months of 2019 to about 7 GW on y-o-y basis with many bids remaining undersubscribed,” ICRA said.

Policy uncertainty short-circuits RE goals

CRISIL Research believes that the unstable

policy environment poses a big risk for the country’s RE targets.

“There is growing incoherence between the policy thrust on RE, on the one hand, and the actual action by implementation agencies like the Solar Corporation of India (SECI) and state distribution companies, on the other,” the Crisil report says citing the ongoing tariff renegotiation in Andhra Pradesh.

In July, the state’s discoms owed around `2,600 crore to RE generators, partly because the state government had been delaying payments over tariff dispute. “Such prolonged payment delays and disputes not only set a negative precedent, but also put at risk existing and planned investments,” Crisil said.

Not only AP, Rajasthan government’s recent policy proposes an additional annual levy of `2.5 lakh-`5 lakh per MW on all projects that sell power to entities outside the state. Should this be implemented, it could

Coal Insights, October 2019

23

INTERNATIONAL

Coal prices to remain weak on China demand concern: Aussie gov report

Coal Insights Bureau

T

he Newcastle benchmark thermal coal spot price is forecast to touch $72 a ton in 2021, as demand softens relative to supply, says a study by the Australian government.

From an average of $105 a ton in 2018, thermal coal benchmark spot price (Newcastle 6,000 kcal/kg) steadily declined in July and August, hitting a 39 month low of $61 a ton in late August.

The thermal coal spot price averaged an estimated $67 a ton in the September quarter of 2019, 13 percent lower than the previous quarter and 40 percent lower year-on-year.

The price slide appears to have bottomed, due to the emergence of supply cuts from the US, Colombia and Indonesia.

“Nevertheless, the benchmark thermal coal spot price is forecast to remain weak over the rest of 2019. With a number of Chinese

ports reaching their assigned annual quotas for coal imports, an expected sharp drop in China’s thermal coal imports towards the end of 2019 is expected maintain pressure on prices,” the latest Resources and Energy Quarterly report from the office of the chief economist said.

Strong short-term demand from Japan is expected to provide an offsetting effect, as nuclear reactors are closed for planned maintenance until early 2020. In the longer term, weak overall demand is expected to keep prices subdued over the outlook period.

The price is forecast to average in the low to mid $70s a tons range over the outlook period, down from an average of $105 a tons in 2018. Towards the end of the outlook period, a gentle recovery in the price is expected, as supply growth slows. There are several risks to the price outlook for thermal coal. Developments in China’s import

policies and domestic coal markets are likely to drive ongoing volatility in thermal coal imports and prices. Supply from marginal producers in the US and Indonesia could also take longer than expected to contract, requiring lower prices to bring the market back to balance.

Weak demand pressure on thermal coal price

In the first half of 2019, imports from Japan, South Korea and the EU were all lower on a year-on-year basis. While Chinese imports have been resilient, the prospect of tighter import controls have weighed on buying sentiment. Persistently low spot LNG prices have also encouraged some coal-to-gas switching — predominantly in Europe — further dampening import demand for thermal coal. Concurrently, large volumes of thermal coal have entered the seaborne market since 2018, resulting in an oversupplied market.

The prices of metallurgical and thermal coal declined sharply in the September quarter. The metallurgical coal price was impacted by rising supply and concerns of weaker demand. The latter relate to the weaker global economic outlook, seasonally weak Indian demand and Chinese import policies. The metallurgical coal price is likely to ease modestly further over the outlook period. Weaker demand has placed downward pressure on the thermal coal price.

Persistently low spot LNG prices have also encouraged coal-to-gas switching – mainly in Europe – adding to weak thermal coal demand. Concurrently, large amounts of thermal coal have entered the seaborne market since 2018. Prices are forecast to be subdued during the outlook period, as oversupply persists.

“The world industrial production cycle has continued to slow in recent months, and looks set to slow further. The extent of any down-cycle in resource commodities largely depends on whether China can avoid a further slowing in growth, and a resolution of US-China trade tensions,” the report said.

The Chinese economy appears to have steadied at a lower pace of growth in the September quarter, as the impact of stimulatory measures — aimed at offsetting the impact of the institution and escalation

Coal Insights, October 2019

41

Expert Speak

Problems and prospects of the coal mining industry in India: Part I The run up to the nationalisation of coal mines Lokesh Ray

T

he nationalisation of the Indian coal industry presented a major watershed in the postindependence industrial scenario of the country, the tremors and ripple effects of which are still being felt across much of India’s core industrial sectors. This article, which is the first in a series on coal mining, shows that the act of nationalisation was poorly planned with little or no economic rationale and the ill effects have far outweighed the benefits. Subsequent writings would focus on the aftermath of nationalisation. This article focuses on the period 1951 to 1971 immediately preceding nationalisation and critically examines the reasons put forth by the government of the day to justify the drastic step of nationalising the entire industry. The fact that today, we are grappling with how to dismantle the edifice created over the past nearly half a century, with no effective solution in sight (the recent attempts for commercial mining and inviting FDI in coal mining do not seem to have met with much success so far), makes it very important for concerned citizens and students of business management in particular to understand the historical process dispassionately, based on facts, so that hopefully we will learn our lessons and try to create educated public opinion that would prevent such follies from being repeated. The article takes a look at the political scene of the time and some of the major actors in the drama, which senior readers may be aware of but in all likelihood the millennial, barring the students of economics are ignorant. It is a digression from the subject but needs to be understood to make sense of what followed.

46 Coal Insights, October 2019

The history of coal mining in India makes for fascinating reading, and it was difficult to resist the temptation to dwell on a few milestones to whet the appetite of the reader.

The history of coal mining in India dates back to 1770 when H G Heatly, the British magistrate of Chhota Nagpur, together with John Summer, teamed up to get permission of the East India Company to mine coal which they finally obtained in 1774 for the privilege of mining coal in Pachete and Birhumn, 125 miles to the north-west of Calcutta.

Soon, six mines came into operation which, in 1777, produced 90 tons of coal. The River Damodar had enough water for only a few months of the year for transporting coal and so the coal mined had to be stacked for a long time. That degraded its quality. A test carried out in 1778 showed that Indian coal was only half as effective as imported British coal.

Heatly was soon transferred to another district and his mining venture came to an end.

The coal front was quiet for some time, but as the demand for coal picked up in Kolkata, in 1814 the economics of mining Indian coal made sense again. The East India Company sponsored William Jones for mining coal in Bardhaman.

He took land on lease from the Rani of Bardhaman and named it Raniganj in her honour. Jones mined coal but incurred persistent losses.

In 1821, Alexander & Co, which had secured the loans taken by Jones, took over and started mining. They performed better, raised production and even earned profits for some time, but the company failed in 1832.

It was subsequently taken over by Carr, Tagore and Company in 1843 to form the famous Bengal Coal Company.

The British authorities were not happy with the near-monopoly of Carr, Tagore and Co in the field of coal mining. They tried

to break it but failed. Bengal’s industrial development started taking off, powered by Bengal Coal Company’s coal.

Dwarakanath Tagore’s dream was to build a railway from Kolkata to Raniganj, that would carry all his coal to Kolkata and he registered the Great Western of Bengal Railway Company in 1845 and appointed Carr, Tagore and Company its agent. But the East India Company flatly refused to allow him to build a railway because it felt that it was inappropriate to have railways ‘under the control of natives’.

The first steam engine therefore chugged into Raniganj in 1855, operated by the East Indian Railway Company. Dwarakanath had passed away, but the railways did carry to Kolkata, coal mined by the company he had founded. That was a great chapter in the annals of Indian business marking the beginning of systematic coal mining in India.

Before proceeding further, it may be of interest to know how coal was discovered by Indians way before the British.

Some boatsmen stopped by the river Damodar at a place called Nonachra, around 2 miles from what is now the town of Ranigunj. They set up a fire on top of a rock to cook their dinner but soon discovered that they were not using wood to keep the fire alive. The very rock was burning. And thus coal was discovered. A boat load was carried away. In fact, the awareness of coal dates even before this, as is evident from the local names of places e.g. yy Kalipahari (hill of coal): A railway station exists by that name now. yy Angarpathra (store of charcoal) yy Damodar (fire in the stomach or bed): The major river that cuts across the coalfield yy Barakar (chief mine): A major railway station and coalfield town Till 1870, the Raniganj coalfield was the only one to be exploited. In 1870, coal was

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Tear along the dotted line

Tear along the dotted line