Coal Insights, September 2016

Contents 20 Steam coal offers remain firm in September 22 Coking coal offers continue sharp rise in September 24 CIL has no plans to revise production target 26 MoC to issue allotment orders for commercial mining of coal by state entities 27 India’s July coal imports down 12.1% y-o-y 28 Fertiliser ministry formulating new coal usage policy 29 India adds 405.5 MW generation capacity 29 India’s July cement production down 10.48% m-o-m 30 Blame it on coal quality for cement sector’s poor response to linkage auction 32 India’s coking coal requirement to go up to 70-75 mt by 2020-21 33 Goyal injects dose of best practices in ministries 38 NTPC shifts 10 mt of coal linkage to pithead plants 39 Corporate update 41 August coal handling by major ports down 20% m-o-m 42 Indian Railways July coal handling down 4.5% m-o-m 43 Railways gears up to carry 750 mt of coal by 2020 47 Does CIL’s CSR policy need a relook?

54 A lot happened over coal 56 US power sector coal consumption to fall 9% in 2016

4 Coal Insights, September 2016

6 | COVER STORY

WCL gives homecoming call to power gencos The miner has opened 17 mines in 17 months, hungry for more, says R R Mishra.

36 | SPECIAL Feature

Land acquisition a major challenge for MDOs: Adani The MDO model has become the desired way of scaling up operations, says Rajesh Agarwal.

45 | Expert Speak

Economic reforms transformed Coal India

50 | INTERVIEW

On the 25th anniversary of reforms, P S Bhattacharyya recalls how a sick PSU was turned into a profitable one.

‘Australian steam coal prices can touch $80/ton in Q4’ Even if India’s appetite subsides, demand from others would keep prices firm, says Rodrigo Cardozo.

58 | INTERNATIONAL

Indonesia riding Kalimantan coal to global markets Kalimantan is set to emerge as a good source of coking coal for buyers, says David Cardell.

Cover Story

WCL gives homecoming call to power gencos

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fter staging a comeback in 2014-15, Western Coalfields Limited (WCL) is now working on several strategies to keep its production momentum going and rev up on the despatches front so that Maharashtra’s power plants do not have to look beyond the state to buy coal. Further, it is planning to set up 4 washeries through a joint venture with MAHAGENCO. WCL is a miniratna Category I PSU, (Government of India) and a subsidiary of navratna public sector undertaking Coal India Limited. The company came into being in 1975 with its head-office at Nagpur in Maharashtra. It has 79 mines spread across its 10 areas located in Madhya Pradesh and Maharashtra. Its customer base comprises power, cement, steel, chemicals, fertilisers, paper and brick kilns etc in southern, northern and central India. Rajiv Ranjan Mishra, Chairman-cum-Managing Director, known for his team-building capabilities and strategic outlook, has taken up a mission to open 36 mines in as many months. And he tells Rakesh Dubey and Arindam Bandyopadhyay how he plans to turn his dream for the company into reality.

Excerpts from a free-wheeling interview:

6 Coal Insights, September 2016

Cover Story Opening a new mine every month – a feat extraordinaire in a country where it takes 4-5 years to start a new project. What made you adopt such a desperate measure? How far has it paid off?

I will explain everything in a story format!

When I took over in October 2014, Western Coalfields Limited (WCL) was heading for a downhill journey after delivering its peak performance so far as coal production is concerned.

There was no new viable project in the pipeline. Nature has given WCL deepseated and low graded coal seams. If that was one reason for the unviability, the other was that land price in India had then started escalating. As a result, viability of many mining projects had gone for a toss.

Without any viable new projects, this company was supposed to reach a peak volume and the break-even was estimated at roughly 40-plus million tons (mt). But we had already touched 45.74 mt in 200910, a record high, before production came down sharply and hit a low of 39.73 mt in 2013-14. During that time, neither was there any new project nor any land with us to arrest the declining trend. Had the situation remained so, WCL would have been referred to the Board for Industrial & Financial Reconstruction (BIFR) by this year (2016-17) and turned sick by 2017-18.

So, after taking over, my first job was to look into the projects that were tagged as commercially unviable. I was informed there were 42 such projects. I, along with my team, started working on each of them and, after a detailed study, found that some of these could be made viable if the mine life was reduced and yearly output increased.

Some others could be viable if they were amalgamated with adjacent projects.

Could you please elaborate how you made such unviable projects viable?

The tragedy of WCL is that its geological condition is very poor. The area has black soil, deep-seated deposits, low grade coal and a very high stripping ratio. If the stripping ratio is high then projects become unviable.

As I said, some of the unviable projects could be made viable by increasing the

Today, we have opened 17 projects in 17 months, which, I think, is a record for any mining company in India or abroad. In 2015-16, we reported a record growth of 9 percent in production with additional 4 mt of output from the new projects. We achieved 45 mt of production last year and we may, if despatches are good, reach 50 mt this year. annual output. For instance, suppose you have drafted a mine plan whereby a 100 mt project will be run for 30-35 years. This will give an annual output of about 3-3.5 mt per annum (mtpa). Now, if that volume does not make the project viable, considering the overheads etc, why don’t you run the project for only 20 years, thereby increasing the output to 5 mtpa? That will not increase the overheads and yet make the project viable.

As for amalgamation of adjacent blocks, let us suppose that there is project A and an adjacent project B. Individually, A has a capacity of producing say, 1 mtpa, and B too has a capacity of 1 mtpa. But, to extract 1 mtpa from either block, I am not getting an international rate of return (IRR) of 12 percent. In other words, if I evaluate a project individually, I find it commercially unviable.

Now, there is about 1 mtpa of coal stuck in the barrier lying in between the two projects, which we have left out and not considered for mining. So, I said, break that barrier, and in doing so the three seams taken together became a 2.5 mtpa project. Joining the projects also helped in doing away with individual overheads, thus reducing overall costs. Thus, as soon as the blocks were amalgamated, the entire project became viable.

What other measures did you undertake to make the projects viable?

The viability of a project is determined by the Central Mine Planning and Design Institute (CMPDI). There are some defined norms in a project report, based on which the costing of a project is arrived at. As a geologist, I have worked with CMPDI. So, I knew where the loopholes were. I don’t say that the project reports were incorrect, but those were made 30-40 years back and were not in sync with today’s environment.

I picked out 5-6 norms which I felt were posing as hurdles and requested the concerned authorities to make changes to them. People felt annoyed at the idea of changing established rules, but I was confident that such changes/modifications would actually benefit us.

Ultimately, after some persuasion – I joined in October 2014 and this was on December 8 – those changes in norms were approved by the board of Coal India Ltd (CIL).

Once that approval came through, we found that out of those 42 projects, as many as 24 would have become viable. It was then that we decided to start opening these projects from January 2015. But while doing so, we found that there is no land available to start these projects (at that point, we had 12 in mind). So, we started focusing on land and, while doing so, we found that when our officials visited the villages, the locals were so hostile that they did not even allow them to enter. To make the land available for these projects, we launched some serious confidence-building measures for the villagers, and this helped us in a big way.

So, we actually started off from January 2015. After the first three months, ie, by April 2015, we found that we had managed to produce 41.3 mt for 2014-15, thus arresting the declining trend in production.

Not only was there growth, we also recorded profit for the year.

We then decided to go for 24 new projects in the next 24 months. Later on, the number was further increased to 36 in 36 months.

So, what is the current status of these projects?

Today, we have opened 17 projects in 17 months, which, I think, is a record for any mining company in India or abroad.

Coal Insights, September 2016

7

SPECIAL FEATURE

Land acquisition a major challenge for MDOs: Adani

Copyright© 2012 Adani Group

Coal Insights Bureau

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mbiguity over land acquisition and possession timeline, coupled with payment risks and liabilities make the job of mine developers and operators (MDO) challenging.

“Projects getting delayed due to opposition to land acquisition by local people is a tough hurdle for MDOs,” said Rajesh Agarwal, Chief Commercial Officer, Adani Mining, while speaking at the 10th Indian Coal Markets Conference, organised by mjunction services limited in association with the Cement Manufacturers’ Association (CMA), in September 2016.

Apart from land acquisition, MDOs face a number of challenges such as the actual time required for obtaining statutory clearances since multiple government agencies have multiple standard procedures. There is lack of availability of skilled manpower as well. Apart from that, past experiences in the mining industry have led to a difficult environment in project financing, Agarwal said.

Agarwal further maintained that MDO operation is open to a number of risk factors.

For instance, there are policy loopholes which delay project execution and hit investor sentiment.

Coal offtake risk is one of the main threats faced by the operators. Subdued power demand from power distribution companies led to low power generation and non-offtake of coal as per schedule. Mining fee payment

36 Coal Insights, September 2016

risk is a major challenge too. One also has to take into account the financial health of state power generation companies due to the cascading effect of the poor health of the state-owned power distribution companies.

Changes in law or government policy, such as the cancellation of coal blocks, also create uncertainty in operations. The MDO may not be at fault but has to shoulder high financial risks due to the massive investments it makes. Coal quality obligation is always a serious challenge for the operators. The quality parameters, particularly ash content, should be linked to in-situ ash percentage.

Force majeure delay is also a major concern. Anything beyond control of either party should be considered as force majeure, said Agarwal.

The importance of MDOs

As the name suggests, the MDO model is basically outsourcing of mining operations.

It is a concept where a coal block owner contracts the entire operations to a third party, which takes the responsibility of land acquisition, resettlement and rehabilitation, mining, developing and operating the particular mine by investing in it and then supplying the coal at a tender determined price to the end-use power plants.

The MDO model has become the desired way of doing business because this route ensures quick augmentation of production in an environmentally safe and sustainable manner. These mining operators manage and

substantially reduce technical and financial risks associated with the project by using modern technology.

It is a beneficial option for the mine owner because it requires limited capital investment and the owner gets guaranteed production and delivery of coal at competitive rates. As a result, being assured of production quantity and quality from the MDO, the mine owner can focus on the end-use project, regulatory clearances, business development, marketing and logistics aspects.

MDO contracts are stringent & long term

MDOs are liable to deliver fixed quantities and quality of coal at a mandated delivery point within a timeline stipulated by the Ministry of Coal and mine owners. Stringent penalty is imposed on MDOs in case of any deviation from the timelines or production norms.

MDO operations Category Allocation/Auction under Coal Mines Act 2015 Allocation under CMN Act 1973 Sub Total (Coal Blocks) Allocation under Mining Rules 2012 MCL Coal Block for MDO Grand Total

No. of Coal Blocks 204 14 218 17 2 237

Expert Speak

Economic reforms transformed Coal India Partha S Bhattacharyya

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oal India Limited is known today as a hugely profitable, debt-free, dividend-paying listed public sector unit (PSU). But those associated with the company for 4 decades or more have seen CIL born sick in 1975 and continuing to remain so till 1991.

It was the economic reforms and unleashing of a changed thought process that pushed the company into financial self-reliance.

As we observe the 25th anniversary of economic reforms, it is worth sharing the impact it had on the fortunes of one of the largest maharatna PSUs of the country.

Nationalisation of coal in the 1970s and formation of Coal India Ltd with 5 subsidiaries in November 1975 happened under trying circumstances. An oil price shock in the 1970s led to evaluation of energy options for the country by a high-powered committee chaired by Dr Sukhomoy Chakrabarti, eminent economist and Member, Planning Commission, which identified coal as the mainstay in the energy scenario. The growth in the coal sector in the ’60s was less than 2 percent CAGR, clearly inadequate to fuel the then aspired GDP growth rate of 5 percent. The low growth was primarily due to inadequate private investments caused by unattractive returns arising from unremunerative administered price of coal. To set the coal price at a remunerative level was equivalent to a political harakiri since coal was widely used as domestic fuel in kitchens.

The only option was to inject massive public funds. This made nationalisation imperative.

Coal workers were a deprived lot with wages well below that of the organised industrial workers. The first task upon nationalisation was to set that right.

Consequently, a wage accord conferring 80 percent hike was implemented, adding substantially to the costs and losses.

Infusion of public funds through budgetary support by way of a Plan loan and equity met capex needs in full. Non-Plan loan was allowed additionally to cover cash loss for the group as a whole till 1982-83 after which the group in totality ceased to incur cash losses.

Coal price revisions happened with a lag of 6 months to a year after successive wage accords. The gap added to the losses.

While setting prices, return on capital was not considered on most occasions. In a few cases, even depreciation was left out on the grounds that the Plan budgetary support covered replacement capex as well. There was virtually no way left for the company to operate profitably.

As if these were not enough, financial viability was systematically ignored while approving coal projects. These were taken up mainly to meet the target of production growth and the criteria was mostly overall economic viability covering the interests of the consumer and transporter (railways) besides the coal producer, rather than the standalone financial viability of the coal project. As a consequence, a good number of coal projects planned for losses were under implementation.

The journey of Coal India Ltd from 1975 to 1991 continued under these conditions.

Commendably, the company reversed the growth rate from less than 2 percent to the mandated growth of over 5 percent CAGR but predictably incurred an aggregate loss of `2,499 crore as on March 31, 1991 - eroding 40 percent of the paid-up equity. Besides, the overdue liabilities to the government on the loan component of the budgetary support aggregated to a staggering `2,229 crore!

Notwithstanding the huge losses and overdue debt service liabilities, there was hardly any financial strain. The capex was met by the government and cash losses in some companies were cross-subsidised by diverting cash from other cash surplus companies under a retention price scheme introduced since 1982-83 once CIL as a group ceased to incur cash loss. With debt service payments to the government being regulated in a ‘payable when able’ manner, life was cosy and normal, not impacted much by the precarious financial results.

Fortunately for the company and the nation, the cosy cycle fell through in 1991 when the country witnessed one of the worst financial downturns. The budgetary support for capex got slashed to a meagre 30 percent.

Coal price revision that was promised to be done annually was kept in abeyance since 1989. Losses of the company reached a peak in 1990-91. Overnight, it became a challenge to finance the large number of ongoing projects. Everything seemed to be in a mess.

A few months after the new government took over in July 1991, the issue of enabling CIL to become financially self-reliant was taken up in a meeting of the Union Cabinet in December 1991. A few far-reaching

Coal Insights, September 2016

45

Interview

‘Australian steam coal prices can touch $80/ton in Q4’

A In the present scenario, coal prices are shooting up. Where are these headed?

What factors impelled the surge?

Coming from 5 years of prices going down, this has a few implications. There are demand drivers and supply drivers.

There were very good reasons for the prices to be so weak (lowest point) in the first quarter (Q1) this year. After 5 years of depressed prices, things got even worse when oil prices came down – remember Brent was at $27 this year, though it has now recovered to $45, then the currencies depreciated.

At that point, one would have thought unless things continued to deteriorate, prices would not remain at that level because, according to my calculations, only about 30 percent of the international producers could have survived.

In the third quarter (Q3), we had a recovery. There are a number of reasons, starting with the fact that it is not okay that

50 Coal Insights, September 2016

fter languishing for 5 years, global coal prices are suddenly seeing better days from the third quarter onwards. But, prices are a function of not only demand but supply-side dynamics, oil prices and currency behaviour too. And then, of course, there is the China factor. The dragon, after failing in its domestic policies on production cuts, is showing an appetite for imports, especially of the Australian variety. And, even if India shows little hunger for the overseas material, there is demand in other geographies, which is now likely to keep prices buoyant, Rodrigo Echeverri Cardozo, Head of Energy Analysis, Noble Resources, who was in town recently to attend the 10th Indian Coal Markets Conference, organised by mjunction services limited in association with the Cement Manufacturers’ Association, tells Madhumita Mookerji. Excerpts:

the producers were not making any money.

And then oil prices went up to $45 and the Australian dollar went from 68 cents to 76 cents. That also put more pressure on the producers. The fundamental dynamics of markets play a role from the supply side.

On the demand side, you actually had the Chinese coming back into the market, which was a surprise for everybody.

From the Indian perspective, the picture is quite green. But when you are talking about the global coal market you will have to see the whole picture.

Thus, Europe has been very negative overall. For interest to Indian buyers or users would be South Africa. I was in South Africa last week and saw that 5 years of price pressure have taken a toll. Production out of South Africa is already going to be 5 million tons (mt) lower this year compared to last year. And there are a number of reasons for this.

First of all, South Africa did have a good year last year, exporting about 75 mt, which is higher than it normally exports and, in contrast, this year it will do probably 70 mt.

66 Coal Insights, September 2016

Tear along the dotted line

Tear along the dotted line