Coal Insights Jan 2013

Chief Editor Rakesh Dubey, Tel: +91 91633 48159, Email: rakesh.dubey@mjunction.in Executive Editor Arindam Bandyopadhyay, Tel: +91 91633 48016 Email: arindam.bandyopadhyay@mjunction.in Editorial Board Alok Srivastava, General Manager, MMTC Ltd Amitabh Panda, Group Director (Shipping & Logistics Operations), Tata Steel Group Anirudha Gupta, Director, P&H JoyMining Equipment India Ltd Ashok Jain, Managing Director, Saumya Mining Ltd Deepak Bhattacharyya, Chief – coaljunction, mjunction services ltd Ganesan Natarajan, WT Director, President & CEO, Ennore Coke Ltd Lawrence Metzroth, Vice President – Analysis & Strategy, Arch Coal Inc M K Palanivel, President – All India Bulk, Samsara Group P S Bhattacharyya, Executive Director, Deepak Fertilisers and Petrochemicals Corporation Ltd S N Choubey, Head – Commercial, ABG Cement Ltd Sandeep Kumar, EIC (Secondary Products), Tata Steel Ltd Shyamji Agrawal, AVP-Central Procurement Cell, Ultratech Cement Ltd Suresh Thawani, Managing Director, Tata Sponge Iron Ltd Advertising Soumitra Bose, Tel: +91 92310 00232, Email: soumitra.bose@mjunction.in Sumit Jalan, Tel: +91 91633 48243, Email: sumit.jalan@mjunction.in Subscription Rachita Das, Tel: +91 91633 48045, Email: rachita.das@mjunction.in Toll Free No.: 1800 4192 000 1. Press 8 for publication Email: publication.tbss@mjunction.in Design Debal Ray, Sobhan Jas For suggestions, feedback and queries, please write to coalinsights@mjunction.in

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EDITORIAL Dear Readers, The New Year started with a bang. Just when everybody directly or remotely connected with the coal sector thought of a brief winter break – relieved as they were that things (read coal production) were looking up – the coal ministry came up with its New Year wish. On January 8, the ministry announced that it is considering restructuring Coal India Ltd (CIL). For those who took it as a mere wish, there was surprise again. The ministry immediately sought EoIs from consulting firms for a detailed study on the ways and means of the restructuring and its likely impact.

Things were evidently getting serious. Some found resemblance to the surprise (GCV) package unveiled at the beginning of 2012. But unlike last year, this time there was hardly a whimper. The industry at large gave out a rather muted response. “Let things take shape first,” they seemed to say. Or perhaps, they are keeping their fingers crossed.

By now, it’s anybody’s guess which side of the “restructuring” the private sector is. There are varied interest groups in the industry. Some people want the rights to produce (merchant mining), some others seek to ensure increased supply to replace higher priced imports. Every interest group seems to believe that privatisation will serve its purpose.

And they are taking “restructuring” as a precursor to the opening up of the coal sector.

But is that really so? Could anybody ensure that privatisation will not create new problems, especially on the pricing front? Once the market is opened, the forces of supply and demand will determine the price of coal. But then, consumption demand is always higher, many times over, and will remain so given the production hurdles that exist today. In a seller’s market, price will naturally have an upward bias. Now, the big question is whether those crying hoarse for the opening up will be ready to accept the market determined price of the dry fuel?

Meanwhile, there could be question marks on the government’s intention as well. It is quite evident that the coal ministry pretty much enjoys its job. The grapevine has it that the prolonged delay in the formation of the coal regulator has its roots in the reluctance of the ministry to part with its control over the commodity. If one applies the same argument, the future of restructuring and opening up may not look that bright.

On the whole, this apparently simple move does not seem that simple if we take a closer look into the implications. This issue of Coal Insights tries to capture the possibilities. There are also some interesting discussions about the increasing role of coal internationally and how it may reduce the role of OPEC in the global energy market.

Meanwhile, due to the rising input costs, we are constrained to increase the price of Coal Insights from this issue, and we hope the readers will bear with us. The coal market is becoming exciting by the day and we pledge to bring to you interesting discussions, as always. So stay tuned.

Happy reading,

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Disclaimer: This document is for information purpose only. Certain information herein has been acquired from various external sources believed to be reliable. While we have taken reasonable care to compile this report, we in no way assume any responsibility for any error or discrepancy in regards to information contained herein. Readers are requested to make appropriate judgment without any prejudice or compulsion.

(Rakesh Dubey) Coal Insights, January 2013

3

Contents 26 Imported steam coal prices show divergent trends in Jan 27 Coking coal prices firm up on restricted availability from Mongolia 28 CIL gearing up to ramp up production in Q4 to achieve yearly target 31 India’s coal imports up 11.7% in 2012 34 CIL switches to BOO scheme for washeries, disappoints big players 36 India’s December power generation up m-o-m 38 Indian paper industry battles slumping demand 40 Sponge iron sector will see recovery only on revival in steel demand 44 The year that was: India in 2012 49 Major Indian refiners despatch 78 rakes of pet coke in December 50 Coal India likely to report marginal decline in Q3 net: analysts 51 Gujarat NRE posts higher Q3 net despite sharp fall in met coke prices 52 World energy efficiency to improve 31% by 2030 58 US coal production declined by 6.3% in 2012: EIA 59 Traffic handling by major ports down 3% in April-December 60 Railways coal handling up 8.8% in December 61 Dedicated freight corridor project to be ready by 2017 63 Coal movement may be affected due to Maha Kumbh Mela 64 Annexure 66 E-auction 68 Port data

4 Coal Insights, January 2013

6 | Cover Story

Restructuring of CIL: A delicate move Splitting of subsidiaries will deliver mixed results, may not ease current obstacles.

20 | INTERVIEW

CIL recast proposal will be counterproductive Don’t unsettle the set up that created the world’s largest coal miner, asks P S Bhattacharyya.

32 | FEATURE

Customs classification may hit India’s coal imports The customs is classifying steam coal as bituminous coal and asking for higher duty.

42 | OPINION

2013 to be slow amid mixed signals from India: Sandvik The company will bring in its entire product range to India once the market opens up.

53 | INTERNATIONAL

Will coal end OPEC’s hegemony?

The rise of coal is a disturbing development for different bodies for different reasons.

Cover Story

W Restructuring of CIL

A delicate move Arindam Bandyopadhyay

6 Coal Insights, January 2013

hen the members of India Inc. demanded a total rejig of the coal mining sector on December 6, 2012, little did they realise they are seeking more than what they can possibly take. Barely a month later, the Ministry of Coal (MoC) announced that it was considering restructuring Coal India Ltd (CIL), the world’s largest coal miner, as part of its effort to overhaul the coal supply chain in the country. It was surmised that the plan announced

by MoC may possibly include splitting up of CIL into multiple companies.

The initial response to the declaration was one of nonchalance. But then, as the government went ahead to seek Expressions of Interest (EoI) from the country’s leading consulting firms, the industry went back to the drawing board.

What it found could be described as cautionary.

A relook into the coal monolith’s functioning,

Cover Story OMS of CIL workers (in tons) A comparison between CIL’s 12 departmental and contract mining 10 brings out the 8 difference in The moot point productivity and 6 “Inefficiency” of CIL has been at the average cost of 4 centre of arguments favouring the opening mining. As of up of the coal sector. By inefficiency, the March 2012, the 2 proponents of privatisation of the coal sector output per manshift (OMS) for CIL’s try to highlight the company’s production 0 mines performance. The state-owned coal miner opencast 2007-08 2008-09 2009-10 2010-11 2011-12 had achieved more than 5 percent growth in stood at 10.40 tons Underground Opencast Overall production during the first three years of the which was not only Eleventh Plan (2007-12) but ended with flat lower than that of growth in the last two years. The sudden dip contract workers but also lower than 13.26 extraction, the management decided to in performance had more to do with external tons of OMS reported for opencast mines of outsource more developmental work for the factors – forest and environment approvals, Singareni Collieries Company Ltd (SCCL), new blocks. Days after taking over as the problems in land acquisition, rehabilitation another state-owned coal miner. Overall, the chairman, S. Narsing Rao said that increased issues and logistics, the company had said in OMS for both underground and opencast deployment of mine developers and operators mines of CIL has seen only a marginal (MDOs) would be a key strategy for CIL defence. to augment production, going forward.

However, what has been largely increase during the Eleventh Plan period.

The increasing contribution of contract Accordingly, the company decided to allot overlooked by both the groups is the productivity issue. CIL has a huge manpower workers in CIL’s total production was around 30 blocks to MDOs in the near term.

The ministry of coal, however, went a of 370,000, the vast majority (over 85 reflected in last year’s wage negotiation, the percent) of which is engaged in on-the-field National Coal Wage Agreement (NCWA) step ahead. While replying to the industry’s or mining related activity. Yet, the company IX. While being satisfied with the wage demand for merchant mining, coal secretary in recent years has been indulging more and increase for permanent workers (88 percent S.K. Srivastava recently said that the more into outsourcing for overburden (OB) hike in basic, 25 percent hike in gross wage government was already offering enough removal and coal extraction. As a result, plus 4 percent special allowance), the trade opportunity to private sector in the form the overall contractual expenses, which also unions demanded a hike in contract workers’ of outsourcing jobs, not only in mining but also in exploration. Already 40 percent of include coal transportation charges and daily wages as well.

“Currently, the contract workers exploration job by Central Mine Planning hiring of plant and machinery, increased 165 percent over the last five years, from `2,093 contribute more than 50 percent of CIL’s & Design Institute (CMPDI), a subsidiary crore in 2007-08 to `5,546 crore in 2011- production and deserve a decent wage. So of CIL, is being outsourced to the private 12. According to an estimate, the volume of we had proposed that the minimum wage sector.

An estimate shows that coal mining in contract workers stood at over 200,000 at the of permanent workers, as per NCWA IX, be made the floor level for contact workers as India is close to a billion dollar business, if end of 2011 and their share in production at well,” a union leader had said. one considers only the cost of extraction.

52 percent.

The issue CIL is currently excavating 450 plus 200 remained unsettled million cubic metres of coal and overburden CIL production growth during Eleventh Plan (%) for some time (OB) every year. As per a thumb rule, the 8 (later on the hike cost of excavating is around `80 per ton of 7 was agreed upon material. This gives an estimated figure of 6 with effect from `5,200 crore (650 mt x `80 per ton) or $1 January 1, 2013), billion. According to CIL’s top management, 5 but the company this business volume is up for competition.

4 management At this juncture, the moot point remains decided to bank what would be the incremental contribution 3 more and more of the massive workforce of CIL to the 2 on increased country’s coal production, going forward? outsourcing to raise What will this huge workforce be left with 1 production.

Not if the company vies more and more for 0 only overburden contract work? At this point, a comparison 2007-08 2008-09 2009-10 2010-11 2011-12 removal and coal with other major coal mining firms may

it said, was laudable. But a total overhaul?

Well, the government would better go slow and take one step at a time….lest the long sought after initiative comes to back hit the users themselves.

8 Coal Insights, January 2013

Cover Story show the Indian coal monolith in poor light.

According to some industry sources, it is this low productivity of CIL that should be the talking point. Any restructuring should be focused primarily on raising the growth contribution of this huge manpower, first and foremost.

The remedy

In recent past, the proposal of restructuring CIL came from the Prime Minister’s Office (PMO) in September 2012. It was during the intense grilling from the opposition over the alleged coal scam that the government thought enough is enough; the Indian coal sector needs a serious relook, perhaps a fundamental restructuring. There, however, were doubts regarding the role of the coal ministry which had by then earned the sceptic’s confidence.

Nonetheless, the ministry fell in line with the PMO’s views, and soon declared that CIL was likely to be taken up for a restructuring exercise. Then in early January, the government said that it would appoint consultants to study the feasibility and likely impact of the process. Initially, it was reported that the government could seek the opinion of the Indian Institute of Management (IIM), but later on the coal ministry sought expressions of interest (EoI) from the country’s leading consulting firms.

The status of a separate entity would bring with it faster decision making and independent operations, which would help the bigger subsidiaries such as SECL or MCL to expand their production base at a faster rate.

The last date of submission of EoIs was January 21. As per the latest information available, a few parties have shown interest in taking up the job. The selected party would not only study the impact of such a move but will also suggest the ways and means to the government for a seamless process. It will also examine the recommendations of various committees in this regard*.

Meanwhile, the market is abuzz with reports that the government may start with splitting the bigger subsidiaries of CIL and turning them into listed entities.

These subsidiaries would be separated both physically and financially. This process may be followed later on for other subsidiaries, depending on ground realities and outcome of the initial moves.

Double impact

While the entire proposal largely remains at the drawing board level, the industry cannot but take note of the development and ponder over the likely outcome. The possible impact

Nothing wrong with CIL restructuring: Rao

C

oal India Ltd (CIL) chairman S Narsing Rao has welcomed the coal ministry’s move to restructure the state-owned coal mining company and said the idea is to make the company more efficient and productive.

“There is nothing wrong (with that)….

The government wants to look at the current arrangement in Coal India and its subsidiaries in the system and see whether this is the best system, or if anything can be changed,” Rao told Coal Insights.

While stating that the move was still at a preliminary level, he said the proposal may consider “hundred percent decentralisation” of CIL subsidiaries or spinning off the bigger subsidiaries such as South Eastern Coalfields Ltd (SECL) and Mahanadi Coalfields Ltd (MCL) only.

“What they finally want to do or how they want to do will be determined by a committee and its recommendations and those would be examined,” he added. *For the detailed scope of the study, see annexure on p. 64

10 Coal Insights, January 2013

of the restructuring could be divided into three categories: a) impact on CIL’s mining operations (or physical performance), b) impact on CIL’s financial performance, and c) impact on the industry at large.

Impact on operations

Production The primary reason for undertaking the whole exercise is to give a thrust on increasing domestic production, 81 percent of which comes from CIL. Naturally, if there is no significant impact of the process on CIL’s production, the entire purpose will be defeated. While pointing that, coal industry sources cannot vouch if the process would actually help boost the growth in production by the coal miner.

This is so because the net impact on overall production performance would depend on a lot of factors which are interdependent. The split of CIL subsidiaries, if implemented, would favour some of these factors but may create hurdles on other fronts.

Currently, the largest subsidiaries in terms of production are South Eastern Coalfields Ltd (SECL) and Mahanadi Coalfields Ltd (MCL), which are followed

by Northern Coalfields Ltd (NCL), Central Coalfields Ltd (CCL), Western Coalfields Ltd (WCL), Eastern Coalfields Ltd (ECL) and Bharat Coking Coal Ltd (BCCL). A detailed analysis shows that the largest three subsidiaries posted highest incremental production during the Eleventh Plan period.

Also, the larger subsidiaries tend to show higher productivity in terms of OMS. It is expected that the status of a separate entity would bring with it faster decision making and independent operations, which would help the bigger subsidiaries such as SECL or MCL to expand their production base at a faster rate. On contrary, the smaller subsidiaries would find it difficult to get out of the clutch of a federal system and hence

Cover Story continue to see a flat growth in production. The net impact on overall production of CIL, post restructuring, would perhaps be positive as it is the larger subsidiaries which make up the majority of the production.

Share of CIL subsidiaries in FY12 production (%) 7

23.7

6.9

ECL 11

CCL 15.3 26.2

Procurement

Open up coal sector: Montek

D

ays before the coal ministry sought expressions of interest (EoIs) from consulting firms for advising the government on a possible restructuring of Coal India Ltd (CIL), Planning Commission deputy chairman Montek singh Ahluwalia strongly pitched for the opening up of the coal sector.

Ahluwalia cited the instance of oil and gas sectors to drive home his point.

“Look at other fuels like oil & gas, they are not nationalised. Coal is certainly less precious and important than them, yet there is no nationalisation of the oil & gas sector but coal sector is nationalised,” said Ahluwalia.

He maintained that CIL does not have the capacity to meet the growing coal demand of the country and hence there is a need to consider denationalization of the sector. He however termed his views as his personal opinion and not of the government.

Meanwhile, the 12th Five Year Plan (2012-17) document has strongly advocated amendment to the Coal Mines (Nationalisation) Act, 1973, which restricts private companies to mine coal for sale to third parties. Currently, private companies are allowed only to do captive mining in specified end-use sectors such as power, steel and cement firms.

12 Coal Insights, January 2013

BCCL

WCL

9.9

The resturcturing process could have a major impact on CIL’s equipment procurement. These include large items and machinaries such as hydraulic excavators, bulldozers, wheel loaders, backhoe loaders, dump trucks, draglines, tippers, fork lifts, motor graders, among others.

Currently, CIL has a centralised procurement system for larger equipment with maintenance and repair contract. Apart from purchasing these tools and machines, CIL also hires equipment from vendors from time to time.

Procuring items in bulk quantities gives CIL two major advantages. First, it can negotiate better on the rates. Second, it can negotiate on the delivery and aftersales services. This advantage is particularly important for larger mining machinaries which are often imported.

“The lack of domestic manufacturing base is a major hurdle for domestic miners and also for CIL,” said an official of a domestic private mining firm. “Since these machines are huge, they command a substantial lead time before the machine is assembled and shipped. In many cases, the Indian companies have to wait for around a year after placing the order before they can actually procure new equipment,” he said.

NCL SECL MCL

Centralised procurement has another major advantage, industry sources said. The volatile movement in currencies often poses difficulty in purchase of such large equipment.

Even a marginal increase in dollar vis-àvis rupee would increase the cost of a large mining machine significantly. A centralised procurement plan can take advantage of a favourable currency movement to save on costs substantially. Post restructuring, this procurement cost may go up significantly, in turn impacting the bottomlines of individual subsidiaries and CIL as a whole.

Marketing

This is perhaps an area where operational independence could potentially bring remarkable benefits for both the companies and their customers. However, according to CIL customers, there are already significant differences in marketing practices by various subsidiaries.

Some industry sources allege that such differences actually create problems for the customers. In view of such market feedback, it seems the proposed restructuring would not bring much change Growth in production during XI Plan (in mt) on this front.

30

Investment

25 20 15 10 5 0 -5

ECL

BCCL

CCL

NCL

Incremental production

WCL Growth (%)

SECL

MCL

“The restructuring could potentially bring a major difference in investment and decision making by independent boards,” said an industry source.

As per current practices, all major investment decisions (above Rs 500 crore) by the large subsidiaries and almost

Cover Story Productivity of CIL subsidiaries in FY12 120 100 80 60

they can at least cut a layer and thus make the investment decisions faster,” the source said.

Project approval implementation

&

requesting anonymity. Another major hurdle for coal mining projects in the country is land acquisition. Although CIL has in recent years revamped its rehabilitation and resettlement (R&R) schemes and increased compensation for land oustees, there has not been much improvement in the situation.

Land has become the bane of existence for all industrial activities. In mining, this is all the more crucial. The recent imbroglio at Dubrajpur block in West Bengal (where the local populace wrested a heavy mining equipment from a private contract mining firm) is yet to be resolved. The proposed restructuring of CIL would not help the independent subsidiaries on this front either, industry sources feel.

In this case, however, things may remain 20 as they are or may turn still worse. In 0 ECL BCCL CCL NCL WCL SECL MCL view of the current equations between the Productivity (OMS) Production (mt) coal ministry and the ministry of environment all decisions by smaller entities need to be and forests (MoEF), no major improvement ratified by the board of CIL. These in turn can be expected from the splitting up of are sometimes passed on to the ministry of subsidiaries. This is so because in case of coal. This makes the processes lengthy and obtaining statutory approvals in India, a Impact on bottomline expensive from investment point of view. collective bargaining is always better than CIL’s balance sheet shows that the two For instance, Bharat Coking Coal Ltd individual applications. largest subsidiaries, SECL and MCL earned (BCCL) being a previously loss making “There is another subsidiary has to send all investment dimension to this,” said Number of projects* awaiting EC decisions for projects involving costs of more an industry official, 16 than `100 crore to CIl board for approval. “the larger subsidiaries 14 Very recently, the BCCL board has may still exert some approved the outcome of the tender on 1.6 influence but the 12 million tons per annum (mtpa) Dahibari smaller and weaker 10 washery project. However, since the project companies would be in cost is above the stipulated level, the proposal a sorry state.”

8 had to be sent to CIL board. Since it takes Currently, CIL 6 around three months for the CIL board to or MoC takes up the 4 send its approval, the order for the project is matter of pending unlikely to be awarded before March 2013.

2 approvals with MoEF In case of bigger projects, these proposals or other departments 0 are sent by CIL board to the ministry and as a whole for all the ECL SECL BCCL CCL WCL MCL NCL NECL takes double time for approval. In fact, a projects taken together. *received after April 30, 2009 number of decisions (including dispute with On an average, it takes customers) for various CIL subsidiaries are four to five years for a coal mining project total pre-tax profit of `11,465 crore, or 54 currently being taken by the ministry. to get all statutory approvals from concerned percent of CIL’s pre-tax profit of `21,251 “Once these subsidiaries are given government departments. If left to individual crore in 2011-12. In contrast, the five operational freedom, they will still be companies, such approvals may take double smaller subsidiaries, ECL, BCCL, CCL, required to report to the ministry; but then the time to get clearances, the source said, NCL and WCL, together earned pre-tax profit of `8,459 crore, or 40 percent of CIL’s Population of CIL’s major OC equipment and their performance* pre-tax profit last year. The remaining part No. of equipment Indicated as % of CMPDI norm was contributed by other subsidiaries and Equipment As on Availability Utilisation activities. The two previously lossmaking subsidiaries, ECL and BCCL, still have 1.4.2012 1.4.2011 2011-12 2010-11 2011-12 2010-11 accumulated losses and had dented the Dragline 40 40 93 92 83 91 overall profit of the miner in past years.

Shovel 727 754 89 90 75 78 Under the present structure, CIL Dumper 3,280 3,217 100 99 69 70 does not get any benefit on its overall tax Dozer 987 981 93 93 58 59 liability due to the losses (if any) incurred Drill 664 709 99 98 71 74 by the weaker firms. This is so because each subsidiary functions as a separate legal *performance in terms of availability and utilization expressed as percentage of CMPDIL norm 40

14 Coal Insights, January 2013

Cover Story

Pros & Cons ♦♦ Making the bigger subsidiaries separate entities would improve their physical performance, but the same cannot be said about the smaller, previously loss making companies. Overall, the impact on coal production is likely to be neutral or positive. ♦♦ CIL’s procurement costs may go up as the company will lose the benefit of getting better negotiation on bulk purchase. This will particularly affect procurment of larger equipment. ♦♦ Operational freedom to subsidiaries would cut one layer in decision making. This may speed up investment decisions and lead to faster project implementation. ♦♦ Project approvals may become difficult for smaller units and those with blocks in forest areas. These companies would lose the weight that CIL as a whole can impose on various departments. The same will be the case with land acquisition. ♦♦ The impact on bottomlines could be neutral. CIL does not get any tax-break for losses incurred by any of its subsidiaries. However, better performance of larger entities could result in improved margins for them. ♦♦ The impact on domestic coal prices would depend on government policies. However, if given the freedom to fix prices, companies with lower cost of operations would enjoy a decisive edge. ♦♦ Apparently, CIL’s restructuring would not have any direct impact on foreign investment in the Indian coal mining sector as the primary difficulty faced by these firms is project clearances which would remain as much a blockade as it is now.

entity and has to take care of its own tax obligations. “However, in a sense, currently the financially stronger subsidiaries work as a cushion for their weaker siblings. This cushion will not be available once the bigger and profitable subsidiaries are separated and turned into listed entities,” a senior official of a coal merchant said.

Going forward, it is expected that the operational freedom would enhance the physical performance of the bigger subsidiaries. Due to faster response time, their operational improvement would reflect into their financial performance. As a result, these larger entities would grow in both size and profitability, while the weaker subsidiaries may continue to perform as they are faring now or see tough times.

Impact on market

The major impact on the domestic coal

16 Coal Insights, January 2013

market would be visible on pricing of the dry fuel and competition between miners, market sources said.

On pricing front, there could be various considerations. The government may choose to continue with the notified pricing system, whereby all the companies would be governed by the same set of prices for various grades of coal. But the recent trend shows the government is thinking on the line of “rationalising” domestic coal prices and may consider bringing changes in the

pricing arrangement in future. Although it is unlikely from the point of view of the present scenario, the government may at some point decide to allow individual firms to charge prices according to their cost structure and/ or demand-supply interplay.

“If the privately listed firms are given freedom on prices, in the presence of insatiable demand, this may lead to very serious impact on consumers. The same set of people that are dying for opening up may find it hard to survive that, once and if it happens,” said an

Currently, CIL or MoC takes up the matter of pending approvals with MoEF or other departments as a whole for all the projects taken together. If left to individual companies, such approvals may take double the time to get clearances, the source said, requesting anonymity.

Cover Story industry veteran. However, in the national interest, it is expected that government would remain conservative at least on this issue, industry sources said.

“In order to restrict imports it is important to maintain a price difference between import price and domestic coal price. What is therefore a more possible scenario is that the miners, if they are split into separate units, may be given freedom to play within a limited price band. In such a case, the companies with better topography and lower cost structure will enjoy better margin than those which have difficult terrain and hence higher costs of extraction.”

In other words, pricing could become a factor of costs if these companies are allowed to compete against each other. Competition is something the Indian coal sector has never witnessed.

Although the CIL management and also the ministry officials now call for competition among private vendors, this can emerge only with a limited scope of providing better service to CIL. The impact of an open competition between miners – be it in public or private sector – is yet to be seen.

Nevertheless, so long as demand exceeds supply, the market would not reap much of the benefit of competition among suppliers.

One benefit to the market could be improved services from the miners. Currently, according to the Indian coal consumers, both

2500 2000 1500 1000 500 0

quantity and quality of coal supplied is a major concern.

Grade slippage and quantity slippage (which varies from 2 percent to 8 percent) are only too common in supply of the material

by CIL subsidiaries.

Competition between miners could lead to some improvement in such areas, industry sources said.

Pre-tax profit earned by CIL subsidiaries in FY12 (`cr)

MCL 5463

A precursor?

“We are just a step behind the opening up of the coal sector,” said Srivastava, during a recent interaction with the representatives of the Indian industry.

What he meant to say was that various sub-segments of the market which were so far exclusively reserved for the state-owned companies are being opened up for private sector participation. The private sector, he wished, could compete as intensely as it wished in those sub-segments of the coal market.

His reply didn’t satisfy the industry, of course. But the recent announcement on restructuring of CIL created some curiosity at some level.

“Whether this exercise will lead the way to opening up of the coal sector or not will grossly depend on what kind Dividend pay-outs by CIL subsidiaries (`cr) of corporate restructuring is the government planning to undertake currently,” said V K Arora, President, Coal Services, Karam Chand Thapar & Bros. Ltd. “As of CCL NCL WCL SECL MCL now, however, these are all 2009-10 2010-11 2011-12 conjectures.

18 Coal Insights, January 2013

ECL BCCL 962 822

CCL 1970 NCL 4265

SECL 6002

WCL 440

We need to wait for the observations of consulting firms that will undertake the study on the subject.”

A former CIL official who is now part of the private sector said this latest move to boost the country’s coal production seems to be forward looking, but then there are too many issues and developments going on at the same time.

“The government and Coal India have taken too many things upon themselves – new block auction, pool pricing, FSA and coal regulator, just to name a few. When and how far these will be implemented will decide the future of the coal sector in the country.”

However, a concern continues to remain.

It was the gross mismanagement of the coal sector in the hands of private owners which led to the nationalisation of coal mines in 1975.

The justifications behind the move, as cited by the government during that time, were identically the same – growth in production, better adoption of technology and increased investment.

Nearly forty years later, these very objectives are being highlighted to justify a move that may lead to opening up of the sector, yet again. What is the assurance that this step won’t prove to be a regressive one, may be another twenty years on?

Well, it will take some time for things to clear up, the industry believes. Until then the India Inc. prefers to keep its fingers crossed.

INTERVIEW

I

t will perhaps not be wrong to say that he touched Coal India with a magic wand and changed the way the company was perceived till then. He is not only credited with turning the PSU around, but is also behind the country’s largest IPO in 2010.

He spearheaded operations at the world’s largest coal mining company from 2006 to 2011 and it was under his leadership that the government conferred the status of Maharatna on the company.

Coal Insights speaks to the former chairman of Coal India, Partha S. Bhattacharyya, primarily on the restructuring proposal of the public sector behemoth, for which the government invited consultancy bids earlier in January.

Excerpts: What are your views on the proposal to restructure Coal India Ltd? This, in my view is a needless exercise. I think Coal India Ltd (CIL) in its present structure is fully capable of meeting expectation of its stakeholders, provided such expectations are reasonable.

Unfortunately, expectations from CIL are often otherwise. Way back in the late eighties it was clear that CIL alone cannot meet the coal demand of the country for the simple reason that mining activity is usually taken up in continuity of existing operations and hence a lot of coal blocks away from existing mines are unlikely to be taken up for mining in the near term. This led to the amendment of the Coal Mines Nationalisation Act in 1993, allowing allocation of such blocks for captive consumption.

Despite more than 200 blocks being taken away from CIL for allotment to captive end users, the New Coal Distribution Policy in 2007 made CIL responsible for meeting the coal demand of the country ignoring objections of CIL to the same. In no country of the size of India a commercially driven enterprise, be it in the public or private sector, is

20 Coal Insights, January 2013

CIL recast proposal will be counter-productive known to have been made responsible for meeting the national demand of a major commodity!

What seems to have been lost sight of is the fact that CIL as a corporate body is primarily responsible to operate in a commercially viable manner in the best interest of its shareholders. Meeting the demand for coal is a national problem which cannot be thrust on CIL just because it is a big player, particularly when necessary changes in policy to bring in more players for coal mining under the captive route were enacted two decades ago.

One may argue that in the absence of opening up of the coal sector for commercial mining not many strong players are expected to enter the market.

The solution for that is to open up the

sector by making necessary changes in statute that is pending for over a decade. This has become imperative in the light of: a) emerging runaway gap between coal demand and supply, and b) the policy for allocation of coal block for captive consumption being questioned. In that situation Coal India will be pitched into competition with other major players.

This will force the company to shed its inefficiencies through required restructuring done internally. A market driven internal restructuring is far more desirable than one based on the views of an outside consultant.

With unleashing of market forces on the supply side, the coal sector in India being essentially viable should be able to attract large global miners

INTERVIEW that would bring in more sustainable environmentally friendly mining practices. This could become the real game changer in making the country self sufficient in coal. Thus it is denationalisation and not the restructuring of CIL that provides the answer to the basic problem in the coal sector today.

Let us not forget that CIL is not only the world’s largest coal mining company but also one of the least cost coal producers of the world.

Undeniably if cost of production is low the total factor productivity has to be high. In other words CIL is not far away from optimum man and machine productivity. Its inefficiencies are confined to certain pockets such as the labour intensive high-cost manual underground mines that contribute not more that 7 percent of CIL’s current production. Competitive pressures are expected to make CIL phase out such uneconomic operations faster. Not many Indian companies can stake a claim to being the World’s largest in their field. Therefore why disturb the structure that has made the company what it is today?

Under the present structure, CIL provides vital policy support to all its subsidiaries. It also plays the role of a unifying force. There is a reservoir of high quality human resources which are deployed to subsidiaries as and when needed. Under this structure, the company has been able to overcome so many challenges and achieve the status of one of the most valuable corporate entities in the country. In my view, Coal India can excel in all aspects working under the very same format only if external factors do not come to play against its interest.

What external factors are you referring to?

These are all very well known. There was no need to push the idea of no-go areas or impose unilaterally a blanket ban on all industrial expansion including mining in areas with CEPI score in excess of 70, without carrying

22 Coal Insights, January 2013

Not many Indian companies can stake a claim to being the World’s largest in their field.

Therefore why disturb the structure that has made the company what it is today?....Coal India can excel in all aspects working under the very same format only if external factors do not come to play against its interest. out a sub cluster analysis to identify the polluting sector. These obstacles pulled the growth rate down to zero in FY 2010-11 from a high of 6.8 percent in 2009-10. Instead of restructuring CIL, the government may focus its attention on these hurdles which have brought the coal sector to a grinding halt.

There are also other issues like non-filling of top posts. Why should it take more than a year to post a regular Chairman at Coal India? A big subsidiary like SECL is without a whole time CMD for more than three years now. In contrast, I am not aware of any administrative ministry of the Govt remaining without a Secretary for even a day! Such matters need urgent attention of the government more than restructuring of CIL. But won’t making the subsidiaries work as separate entities beget greater operational freedom and less bureaucratic control?

Instead, this will bring more bureaucratic hassles. From the government’s point of view, it is far easier to handle one large entity i.e.

CIL instead of 8 medium sized entities.

All these subsidiaries have numerous issues which are currently addressed

by Coal India and its Board. In case the subsidiaries are made independent who will address these issues?

A market driven internal restructuring is far more desirable than one based on the views of an outside consultant.

CIL regularly holds the CMDs’ meet once a month where all the CMDs of subsidiary companies come to share various issues and sort them out through sharing of resources and expertise. Don’t you think this is a valuable support they can fall back on? Do you think the lossmaking companies like ECL and BCCL could come out of the loss so early if that support was not there?

As for the lossmaking subsidiaries, what could be the likely impact of such a restructuring? Will it lead to a gradual extinction?

Well, I think there are no lossmaking subsidiaries any more. Both ECL and BCCL are now earning handsome profits. But of course, they couldn’t have made such a turnaround without the support of Coal India.

You need to appreciate the value of rational allocation of top managerial talent that Coal India does to enable the subsidiaries handle crisis situations. In 2007, ECL had a major managerial crisis in its largest mine where production fell drastically from 11 to 7 million tons.

A highly competent CGM was moved from another subsidiary to ECL and the production was back on rails in 2 years. At times of crisis, Coal India moves the best of the (human) resources to address the problems. Otherwise, given a choice, no competent manager would have chosen to move to the loss making units. Because of the unified structure competent officers do not have problems in moving out from profitable subsidiaries to join difficult companies like ECL and BCCL as directors. The turnaround of ECL and BCCL is largely attributable to this factor.

INTERVIEW How will the restructuring impact Coal India’s bottom line?

Difficult to answer unless the details of proposed restructuring are known. As on date every subsidiary is a separate legal entity and CIL as a whole has not been able to get any tax break on the losses of its loss making units.

How will the exercise impact coal production in the country? Don’t you think the performance of companies like SECL and MCL will improve due to greater freedom in taking investment decisions and project implementation?

Not really. Under the present structure they have enough authority to go for new projects. As for investments, the five Miniratna subsidiaries – SECL, MCL, NCL, WCL and CCL – can take investment decisions of up to Rs 500 crore in each case. Only two subsidiaries – ECL and BCCL – have a lower cap. For investments beyond these sizes, of up to Rs 5,000 crore in each case, CIL Board can decide. In coal mining these limits comprehensively cover all projects leaving hardly any project for decision of the government.

If the subsidiaries need greater freedom on investments, the bigger ones may be considered for elevation to Navratna status. The government can give a thought to that.

Another major advantage for the subsidiaries is the central procurement system for larger

24 Coal Insights, January 2013

Such proposals have been surfacing from time to time in the past. In all such cases it created uncertainty and concern for the company’s rank and files and put the management in a dilemma.

CIL, to my mind, does not deserve it any more. equipment with Maintenance & Repair Contract (MARC) for long term. The centralisation enables making sensible changes in the tendering process to infuse competition. In one particular case, CIL could infuse competition by making suitable modifications in tender conditions leading to the procurement of 42 cubic metre shovels in 2010 at a price lower than the price at which the same equipment was bought in 2007 by SECL. Introducing integrity pact and holding extensive pre-NIT discussions were some of the forward looking practices introduced to bring in more competition in the procurement process.

It is difficult to build these competencies in a decentralised manner in each subsidiary.

Finally, what in your view is the possibility of this restructuring taking place?

It is difficult to guess the outcome. But from past experience, I can only say that such proposals have been surfacing from time to time in the past. In all such cases it created uncertainty and concern

for the company’s rank and files and put the management in a dilemma. CIL, to my mind does not deserve it any more.

Also this time around, I am a little confused as Coal India is now a listed entity. Also, the company is back on the growth trajectory, registering around 8 percent growth in production yearon-year. What will be the impact of this proposed restructuring on the million odd shareholders that include global institutional investors?

On a different note I am not sure whether such an exercise is based on the recommendations of any duly constituted committee. I recall the T L Shankar Committee recommending the Coal India chairman to act as Chairman of all the subsidiaries.

That however was impractical; but don’t recall anything on splitting the subsidiaries.

Having said this let me reiterate that the current structure is just about fine for the company. And Coal India can deliver its best under the very same structure provided it is not compelled to face avoidable external challenges every now and then.

coal market fundamentals

Imported steam coal prices show divergent trends in Jan Coal Insights Bureau

I

mported steam coal prices continued to witness divergent trends in January with prices of South African and Australian coal easing, while Indonesian coal prices inched up amid scant buying interest.

South African coal (6000 kcal/kg NAR) prices eased to $83.7 per ton fob on January 21 compared to $88.9 per ton fob on December 28. Australian coal (6300 kcal/ kg GAR) prices eased to $92.5 per ton fob compared to $93.9 per ton fob on December 28.

Indonesian coal (5900 kcal GAR) prices remained firm at $72.9 per ton fob on January 21 compared to $71.5 per ton fob on December 28. Prices of Indonesian coal (5000 kcal/GAR) also rose marginally to $56.9 per ton fob on January 21 compared to $56.2 per ton fob on December 28.

The main reason for the muted price

is oversupply in the Chinese thermal coal market as traders started to wind down for the holiday season, the up-coming Lunar New Year break, amid sluggish demand from end-users, sources said.

Poor weather at Qinhuangdao and other coal export ports in northeast China have impeded some coal shipments to power plants along the Asian country’s coastline, but well-covered Chinese end users were refraining from panic buying, sources said.

China’s industrial electricity consumption generally grinds to a halt during the Chinese New Year holidays in February and coal demand is expected to slump accordingly.

Sources said Chinese end-users had too much coal stored away for colder weather in China to have much impact on spot demand.

Meanwhile, falling dry bulk freight rates exerted further downward pressure on Indian CFR prices. Sources said stockpiles at India

Steam coal FOB ($/ton) SOUTH AFRICA (6000 NAR)

AUSTRALIA (6300 GAR)

1 January 2013

88.8

93.8

71.5

56.2

38.5

33.4

2 January 2013

88.65

92

71.6

56.4

38.7

33.5

3 January 2013

88.1

91.4

71.7

56.9

38.9

33.5

4 January 2013

87.8

91.35

71.9

57.15

39.2

33.7

7 January 2013

87.4

92.3

71.9

57.15

39.2

33.7

8 January 2013

87.1

92.4

71.9

57.15

39.25

33.7

9 January 2013

86.6

91.8

72.1

57.15

39.25

33.7

10 January 2013

85.65

91.65

72.25

57.2

39.3

33.75

11 January 2013

86.15

91.9

72.1

57.2

39.25

33.7

14 January 2013

85

92.4

72.4

57.2

39.25

33.7

15 January 2013

83.5

92.15

72.6

57

39.25

33.7

16 January 2013

83.3

92.15

72.6

57

39.25

33.7

17 January 2013

83.3

92.15

72.8

56.9

39

33.6

18 January 2013

83.2

91.5

72.9

56.9

39

33.6

21 January 2013

83.7

92.5

72.9

56.9

39

33.6

Dates

26 Coal Insights, January 2013

INDONESIA 5900 GAR

INDONESIA 5000 GAR

INDONESIA 4200 GAR

INDONESIA 3800 Kcal GAR

are high and there are around 11-12 million tons (mt) of stock at the ports and the stocks at power plants are comfortable too.

According to the recent Central Electricity Authority (CEA) data, combined coal stocks at Indian power plants had risen to over 11.41 mt as of January 15.

Railway rakes

Under pressure from the government to optimise coal supply to power plants, Indian Railways is trying hard to touch a record 200 rakes of coal a day to plants.

Sources said since November the Railways has been managing its rolling stock to clock at 175 rakes per day from the usual average of around 157. In fact, Coal India’s (CIL) pit-head stock has now decreased from 70 mt in April to 43 mt in November, a 40 percent drop.

Imports to rise

India’s coal imports may rise helped by a spurt in heating demand due to a severe cold wave.

India’s northern region has been witnessing the coldest weather in at least 44 years, which has led to the death of over 100 homeless people, according to reports.

Traders currently expect January imports to be up 10 percent from December, estimated at 14.2 mt last month and 13.8 mt in November.

Trade sources said imports have been on the rise since October to meet the higher energy demand during winter. The trend is expected to get a big push in the fourth quarter (January-March) of 2012-13, aided by the current cold conditions.

India imported 90 mt of thermal and coking coal between April and November, up 26.8 percent from a year earlier.

Thermal or steam coal, the fuel mainly used by power producers, accounted for nearly 70 percent of coal shipments in the first eight months of the 2012-13 fiscal year.

India’s coal ministry expects production of 574.40 mt in 2012-13, up 6.4 percent from a year earlier.

The trend indicates that India could import about 100 mt of thermal coal alone in this fiscal year. In 2011-12, Asia’s thirdlargest economy imported more than 100 mt of thermal and coking coal, a substantial jump over a year earlier.

coal market fundamentals

Coking coal prices firm up on restricted availability from Mongolia Coal Insights Bureau

S

pot prices of hard coking coal in Australia has firmed up by around $8 per ton since the beginning of 2013 largely because of restricted availability of the material from Mongolia to Chinese steel mills, industry sources in India said.

“There are reports which suggest restricted supplies of coking coal from Mongolia to China, and this has prompted Australian miners to raise prices in anticipation that Chinese companies will resort to increased buying from them,” the sources said.

According to information available with Coal Insights, premium low-vol HCCs traded at around $168 per ton FOB Australia on January 18, down from $160 per ton FOB on

December 28. Peak downs prices firmed to around $167.50 per ton on January 18, up from $159.6 per ton on December 28. The semi soft variety was quoted at $116 per ton on January 18 compared to $117 per ton on December 28.

However, a section of the industry feels that coking coal prices have firmed up only on paper and there is not much actual buying happening in the spot market.

“Taking a cue from firmness in iron ore prices following reported revival in demand from China, the miners have firmed up coking coal prices even as trade volumes in spot market have not improved much,” they felt.

Earlier, a significant increase in prices was witnessed in October and November 2012, when prices spurted from a low of around $142/ton as on October 1, 2012 to $150/

Coking coal FOB ($/ton) Peaks Down (CSR 74%, VM-20.7%, Ash-9.7%, S-0.6%, P-0.03%, TM-9.5%)

Prem Low Vol (CSR-71%, VM21.5%, Ash-9.3%, S-0.50%, P-0.045%, TM-9.7%)

1 January 2013

159.7

160.2

2 January 2013

159.7

160

3 January 2013

160

160.5

Dates

HCC 64 Mid Vol (CSR-64%, VM25.5%, Ash-9.0%, S-0.6%, P-0.050%, TM-9.5%)

Semi Soft Coking Coal

Met Coke

117

291.00

148

119

291.00

148

119

292.00

4 January 2013

159.8

160

148.5

119

292.00

7 January 2013

160.6

161

148.5

119.5

294.00

8 January 2013

160.6

161

119.5

296.00

9 January 2013

162

162.5

149

119

299.00

10 January 2013

162.5

163

150

119

301.00

11 January 2013

163

163.5

150

116

301.00

14 January 2013

165

165.5

152

116.5

301.00

15 January 2013

166

166.5

152

117

301.00

16 January 2013

166

166.5

152

117

301.00

17 January 2013

166.5

167

152.25

117

304.00

18 January 2013

167.5

168

153

116

304.00

21 January 2013

167.5

168

153

117

304.00

Met coke prices improve a bit, demand remains subdued Despite slight improvement in imported metallurgical coke prices during January, the price of domestic material continued to remain subdued on sluggish demand from steel makers, an official of a leading coke maker told Coal Insights.

According to him, the price of sized met coke is currently quoted between `18,000 and `20,000 per ton depending on quality, but high ash material of 14 percent ash is quoted at around `15,500 per ton.

“Extremely low quality coke of 2426 percent ash content is available even at `11,000 per ton,” he said.

“The current quoted price of met coke is anywhere between `15,500 per ton and `20,000 per ton depending on quality, but deals for decent material are mostly happening in the range of `16,500 per ton,” an official of a steel company said.

Meanwhile, the price of imported met coke improved by around $13 per ton to $304 per ton as on January 18 compared with around $291 per ton as on December 28, according to information available. ton as on November 2, 2012 and further to around $160/ton as on December 3, 2012.

However, there was practically no movement in coking coal prices in entire December and in the first week of January 2013 as the prices moved below $160/ton level, but firmness came into existence from the second week of the month after industry people came back from their Christmas holidays and prices soared to $167.50/ton.

Slower demand from China and continued supply from traders made prices for international spot coking coal, especially premium hard coking coal, ease marginally in December.

Coal Insights, January 2013

27

Feature

CIL gearing up to ramp up production in Q4 to achieve yearly target Rakesh Dubey

C

oal India Ltd (CIL) is gearing up to achieve its 2012-13 coal production target of 464.10 million tons (mt) by exhorting its entire workforce to scale up production during the last quarter (AprilMarch) of the year, a top official of the company said.

CIL’s production till the end of the third quarter (December 2012) stood at around 309 mt, up almost 18 mt compared with 291 mt produced during the corresponding period of previous financial year.

This indicates that the company has to produce as much as 155 mt of coal during the last 90 days left in the current fiscal. Also, it has to despatch around 135 mt of coal during the period.

28 Coal Insights, January 2013

“The real challenge now is to increase output during the last quarter of 2012-13.

The finals have just begun and we have to slog…Obviously, finals are to be played like finals,” CIL’s Chairman S Narsing Rao said.

Till December 2012, CIL’s production performance has been generally good even though there was an impact on production during the first 10 days of November due to cyclone Neelam. That little impact, however, has been overcome to a great extent, assured Rao. The general trend over the past few years shows that the company fares exceedingly well in production during the last quarter.

There however was an exception to this phenomenon in 2010-11 when the Ministry of Environment and Forests (MoEF)

introduced the Comprehensive Environment Pollution Index (CEPI).

“The last quarter of 2011-12 was outstanding not only in terms of production, but in off-take also. Last year, the off-take was 122 mt during the last quarter, against 114 mt in the third quarter. So off-take was higher by 7-8 mt in Q4 compared with Q3,” Rao pointed out.

“We were not too worried about production in the last quarter of 2011-12 so long it matched off-take. Unless production is there, we can’t really do off-take, but if production matches the off-take, it is fine.

Even if there was overall shortfall in the production in 2011-12, we had almost achieved our objective as we had achieved our off-take target by liquidating the stock,” he said.

“But this year, given the very formidable target we have set for ourselves as we have to do an off-take of 135 mt in the last quarter of 2012-13, the challenge is enormous,” Rao said.

“Another 89 days are left in the current financial year (as on January 3, 2013)…To meet production and off-take targets, we have started counting the days in the way balls are counted during the last 5-10 overs of a one-day cricket match,” the Chairman said on a lighter note.

feature Coal production and despatch by CIL in 2012-13 (in mt)

Unlikely to import coal this fiscal

Asked about the latest update on import of coal by the company for supplies to power sector, the Chairman said that CIL may not have to import coal during the current financial year as final decision on pooled price mechanism is yet to come.

“At present, the ball is in the court of the Ministry of Coal. Even if any decision is taken by the Ministry, the actual landing of imported coal will not happen at least till March 2013,” he said.

According to information available with Coal Insights, the Ministry is planning to prepare a cabinet note within January so that CIL can be forced to go for import of coal.

Industry sources feel that CIL will be forced to import only if presidential directive comes from the government, but the possibility of that is quite remote as there might be opposition within the cabinet on such a move.

50 45 40 35 30 25 20 15 10 5 0 Apr

Ma y

Jun

Jul Producti on

“If at all pooling happens, power plants will not get any benefit at least during the current fiscal. We are already into January and I see it difficult that landing of coal will

To meet production and off-take targets, we have started counting the days in the way balls are counted during the last 5-10 overs of a one-day cricket match

Aug

Sep

Oct

Nov

Dec

Des pa tch

take place by March 2013 because first, the proposal has to be approved and then other processes have to be followed,” Rao said.

This implies that power generators like NTPC who were hoping to get imported coal through CIL at pooled prices, would not get any benefit at least in the current financial year, even if the proposal is finally accepted by the government.

If pooled pricing gets the final go ahead, CIL will be required to import coal and then supply the same to power plants at a price which would be price neutral to the miner.

CIL signs 46 FSAs with power plants, NTPC yet to sign

C

oal India Ltd (CIL) subsidiaries have signed as many as 46 fuel supply agreements (FSAs) with power plants, including one with Damodar Valley Corporation (DVC) till January 23, a senior official of the company told Coal Insights.

“We have so far signed 46 FSAS with commitment to supply around 60 million tons (mt) of coal to ignite power generation to the extent of 16941 MW,” the official said.

NTPC Ltd had not signed Fuel Supply Agreements with CIL for its new power plants till January 23 despite an assurance to this effect by the Chairman and Managing Director of the power generator towards end of December 2012.

“NTPC has not yet signed even a single FSA under the revised guidelines even as the deadline is January 31. NTPC is till now saying that they will sign the FSAs within the schedule, but it is yet to get approval from its board,” the official added.

“NTPC will have to finish a number of formalities internally, including getting board’s approval and as such the signing of FSA is getting delayed,” he said.

The official said that DVC has signed FSA for its Koderma plant while other prominent signatories are TNEB, APGENCO, UPSEB, HPGCL, Anpara, Haduaganj, Bajaj Energy, Rosa, Adhunik Power, CESC for third unit of Budge Budge, Mundra of Adani and MPSEB for their Satpura plant.

However, despite not signing the FSA, NTPC and some other plants are getting coal supplies from CIL under Memorandum of Understanding.

The company is supposed to sign around 87 FSAs as per revised norms.

“Some plants may not be in a position to sign FSA because either they are not fully ready or they have not yet been able to sign power purchase agreements (PPAs) with distribution companies,” the official said.

It is likely that some of the plants of state generators are not ready and as such they are not in a hurry to sign FSAs, he said, adding, similarly, private power plants might not have signed PPAs and as such are not eligible to sign FSAs.

Coal Insights, January 2013

29

Feature Meanwhile, overall coal import by the country’s domestic coal based power utilities, including NTPC, has fallen significantly short of the proportionate target set for the nine months ended December 2012.

The total import of coal by power utilities during the period (April-December, 2012) stood at 43.66 mt, which is 84 percent of the target of 51.79 mt.

However, imports during the period were 31.31 percent higher than 33.25 mt imported during the corresponding period of 2011-12.

Of the total import during the first three quarters of 2012-13, imported coal based plants had brought in 21.27 mt, which is 118 percent of the target of 18.00 mt, whereas domestic coal based plants had brought in only 22.39 mt of imported coal, which is 66 percent of the target of 33.79 mt.

During the corresponding period of 2011-12, imported coal based plants had brought 12.51 mt of coal, lower than the target of 15.00 mt, while domestic coal based plants had brought 20.74 mt of coal against the target of 26.25 mt.

NTPC’s coal imports during the first nine months (April-December) of 2012-13 stood at 7.16 mt, which was only 60 percent of the target of 12.00 mt (for the period) and also down 27.31 percent from 9.85 mt imported during the corresponding period of 2011-12.

“When CIL is supplying more than 100 percent of FSA quantity, why will they use imported coal? Till December 31, 2012, our aggregate supplies are almost 91 percent of the FSA commitment to power sector though some plants may be getting 120 percent of FSA quantity while others may be getting 75-80 percent.

Now when we are able to supply 91 percent of the agreed quantity to the power stations, which is more than the trigger level of 90 percent for old power stations, there is no pressure on them to use imported coal,” a CIL official later told Coal Insights.

Supplies to power sector

Rao said that the company expects to supply an aggregate 87 percent of the FSA quantity in 2012-13 considering that for new power plants the trigger level that will entail payment of penalty is only 80 percent, including 15 percent of imported coal.

30 Coal Insights, January 2013

CIL starts signing “side” agreements to supply imported coal

C

oal India Ltd (CIL) has started signing “side” agreements with power sector consumers with whom it has already signed Fuel Supply Agreements (FSA) to supply imported coal and will soon select a public sector trading company to import the material, a senior official told Coal Insights.

“As per the FSA conditions, the trigger level at which penalty or bonus clause would come into effect is 80 percent of the total agreed quantity i.e. if CIL supplies up to 80 percent of the agreed quantity of coal to power companies, it will neither pay penalty nor get any bonus. However, of this 80 percent quantity, the power companies will have to take 15 percent imported coal and the balance 65 percent would be indigenous coal,” the official said.

“For meeting the requirement of 15 percent of FSA or imported coal part of the FSA, we had to sign some side agreements with power companies and now this process has been started because at least some companies have agreed to take imported coal through CIL on cost plus basis,” the official said.

As per latest update, he said that based on numbers of such ‘side’ agreements already signed (till January 23), CIL will have to supply around 2 million tons (mt) of imported coal. The official could not provide the exact numbers of ‘side’ agreements which have been already

He, however, indicated that in 2013-14, the supplies to power plants may aggregate to 86 percent of the FSA quantity because by then some more power plants are likely to become operational.

CIL has agreed to supply 347 mt of coal to power sector in 2012-13 and even if it ends up supplying 90 percent or 91 percent of this agreed quantity, it will not have to pay penalty for short supplies, because the trigger level at which penalty is liable to be paid is 90 percent of the FSA quantity for the old

signed, but said that “This figure (of 2 mt) will increase as we sign more side agreements with power companies.”

Asked if they have already decided through which company the imports would be routed, the official said the company had earlier decided that it will take imported coal only through public sector trading companies, but has not yet finalised whether it will be MMTC or STC. “We are in the process of selecting the PSU,” he said.

“As soon as the PSU company is finalised, and we are able to make final assessment of how much imported coal would be needed for supply on cost plus basis, we will float the NIT, which is being worked upon by PricewaterhouseCoopers (PwC),” the official said.

Meanwhile, a senior official of one of the PSU coal trader said, “We had been hearing about CIL’s coal import plans for last almost one year, but nothing has happened. Let’s see what happens this time.”

Coal Insights understands that CIL may float NIT for imported coal very soon, but actual landing of such coal may not happen during the current financial year considering the time lag involved in arriving at a firm quantity, then floating the NIT and after that placing the orders.

It will take at least another nearly 20-30 days for delivery of imported coal after the order is finally placed.

plants and 80 percent, including 15 percent of imported coal, for the new plants.

In 2013-14, CIL’s coal supply to power sector will be 372 mt, which will go up to 479 mt in 2016-17, the terminal year of Twelfth Five year Plan (2012-17).

“Next year, our target to supply to power sector is huge. If we achieve that, it would be a formidable task,” Rao said, indicating that the company may go for import of coal in 2013-14 to meet its supply commitments.

Feature Import from RBCT touches peak

India’s coal imports up 11.7% in 2012

Coal Insights Bureau

I

ndia’s import of coal and coke in 2012 through 30 major and non-major ports rose by 11.76 percent compared with 2011, driven largely by a spurt in imports of steam coal and petroleum coke, according to a provisional compilation by Coal Insights*.

The country’s import of coal and coke stood at 135.11 million tons (mt) in 2012 (+/-2 percent) compared with 120.89 mt imported in 2011, the compilation revealed.

However, coal import in December 2012 which was initially projected at 10.02 mt may go up to 12.00 mt. This revision will increase total imports in 2012 to 137.11 mt resulting in a rise of 13.423 percent over 2011 import of 120.89 mt.

Of the total import of 135.11 mt in 2012, steam coal accounted for as much at 94.78 mt, up 11.92 percent as compared to 84.68 mt imported in 2011.

The import of coking coal stood at 32.28 mt showing an increase 7.49 percent over 30.03 mt imported in 2011 whereas import

of petroleum coke (both calcined and fuel grade) surged by 46.78 percent to 3.80 mt in 2012 from 2.59 mt imported in 2011.

Import of metallurgical (met) coke in 2012 stood at 1.92 mt, up 58.67 percent from 1.21 mt imported in 2011, according to the compilation.

However, the import of anthracite coal fell by 32.06 percent to 0.89 mt from 1.31 mt imported in 2011 while import of pulverised coal injection (PCI) coal in 2012 stood at 1.44 mt, up from 1.07 mt imported in 2011.

Coal and coke imports (in mt) 2012

2011

Coking Coal

32.28

30.03

Steam Coal

94.78

84.68

0.89

1.31

Anthracite Coal Petroleum Coke

3.8

2.59

Met Coke

1.92

1.21

PCI Coal

1.44

1.07

135.11

120.89

Total

Note: For 2012, the figure for December is provisional.

India’s coal import from Richards Bay Coal Terminal (RBCT) of South Africa stood at a record 21.45 mt in 2012 on the back of a record import of 6.75 mt coal in the fourth quarter (October-December), according to data made available by one of the promoters of the terminal.

India’s coal import from South Africa had fallen to 16.13 mt in 2011 from 20. 99 mt in 2010, which was attributed to a firm price trend prevailing during the previous year.

The higher import in 2012 was attributed to the softness in South African coal prices from September till December that led to a spurt in Indian imports during the last quarter (October-December) to 6.75 mt as imports during each of the three months of the quarter stood above 2.0 mt, and peaked to 2.40 mt in December.

“We have finished the year with a positive story in December or you can say it was a bullish finish to the year as far as exports to India and China is concerned,” an official of a leading South African coal miner said.

India accounted for 31.34 percent of the total coal exported through RBCT in 2012 compared with a share of 24.95 percent in 2011.

Imports up 12.6% in FY13

Meanwhile, import of coal and coke during the first nine months (April-December) of 2012-13 is estimated at 103.23 mt, up 12.62 percent compared with 91.66 mt imported during the corresponding period of 2011-12.

The import of coking coal during AprilDecember 2012 is estimated at 24.64 mt, steam coal at 72.27 mt, anthracite coal at 0.71 mt, petroleum coke at 2.93 mt, met coke at 1.63 mt and PCI coal at 1.08 mt.

During the corresponding period of 2011-12, the import of coking coal was estimated at 23.50 mt, steam coal at 63.47 mt, anthracite coal at 0.82 mt, petroleum coke at 1.97 mt, met coke at 0.83 mt and PCI coal at 1.07 mt.

The compilation is based on data received from customs, shipping companies, port officials and monitoring of vessels positions at various Indian ports.

Coal Insights, January 2013

31

Feature

Customs classification may hit India’s coal imports Coal Insights Bureau

T

he import of steam coal to India, particularly the high calorific value steam coal, may be severely affected, as Customs officials have recently issued notices to some importers and customers, asking them to pay higher duty on their imports after classifying their material as “bituminous coal” or coking coal, at least five industry sources told Coal Insights.

By classifying higher calorific value steam coal from Indonesia and South Africa as bituminous coal, the consumers and traders may be asked to pay higher duties, a source from Gujarat claimed.

“Already the high calorific value steam coal from the US are being classified by the customs officials as coking coal and the importers are being asked to pay CVD on the basic price of coking coal which in majority of the cases are more than double of steam coal prices,” he added.

32 Coal Insights, January 2013

Meanwhile, the officials of Directorate of Revenue Intelligence (DRI) in Gujarat have collected samples from various vessels that berthed between January 8 and January 18 at some ports in the state with US steam coal cargo to analyse and check if coking coal or bituminous coal is being imported in the name of steam coal, a second source said.

“The customs department has collected samples of high calorific value steam from the vessels bringing in coal from at least three ports – Navlakhi, Muldwarka and Dahej – to analyse if companies are importing coking coal or bituminous coal in the name of steam coal,” he said.

There is no duty on import on coking coal, but countervailing duty (CVD) of 6 percent is charged on the assessed price of the material. However, a duty of 5.5 percent in addition to CVD is charged on bituminous coal.

Before sample collection by DRI, the customs officials had demanded from at least

two importers of US steam coal to pay CVD after they assessed the material as coking coal and valued the material at much higher price.

“We had been asked to fork out additional `16 crore as CVD after the customs officials claimed that our US steam coal cannot be taken out of the port unless we pay higher CVD because according to them it was a coking coal, the price of which is about $100 per ton higher than that of steam coal,” an official of a company said.

“We paid the duty under protest in order to take our cargo out of the port,” he said.

The company had imported 6900 Kcal/ kg US steam coal at about $105 per ton fob, but the price of the material had been assessed by customs department at $205 per ton because of its high calorific value, he claimed.

Because of the increase in assessed price, the CVD payable had gone up to $12.30 per ton on assessed price of $205 per ton instead of normal duty of $6.30 per ton on actual price of $105 per ton.

“There is no logic in identifying steam coal as coking coal. Steam coal cannot be used as coking coal just because of high calorific value and it contains some amount of swelling index and mean reflector,” an industry expert said.

“As per international norm, other properties like swelling index and vitrinite also has to be there besides swelling index of 5.0 and mean reflector of 1.0 in order to classify as coking coal,” he added.

Feature However, as per the Customs notification, any coal which has swelling index of 1 and mean reflector of 0.6 can be classified as coking coal, while any coal with volatile matter exceeding 14 and calorific value of equal to or over 5,833 Kcal/kg can be classified as “bituminous coal” .

A third industry source said because of the sub-heading of notification under Chapter 27, almost all types of high calorific value coal that is being imported to India can be classified as ‘bituminous coal’.

Besides the company which has already deposited `16 crore as demanded by customs department, a leading cement maker, a zinc manufacturer and a leading importer-cumsupplier too have been asked to pay a higher duty.

More names might come after the report of sample analysis comes out because US steam coal inherently has some coking coal qualities, but it cannot be used as coking coal because of low swelling index and low mean reflector.

Incidentally, India had removed customs duty on steam coal from April 2012 till March 2014 and an announcement to this effect was made by the then Finance Minister Pranab Mukherjee in February during his Union Budget proposals for 2012-13.

The decision to remove customs duty on steam coal was taken in view of the fact that the country was facing shortage of domestic

coal and it was expected that by removing the customs duty, the price of power can be kept reasonable that in turn would keep Indian industry competitive.

“But by resorting to this practice i.e. classifying high calorific value steam coal as coking coal, the basic purpose of the budget announcement is being defeated,” a trader based out of Delhi said over telephone.

According to information available with Coal Insights, a large number of traders and consumers had recently imported high calorific value US steam coal at around $80 per ton fob (for 6000 Kcal/kg NAR) and at around $105 per ton fob (for 6900 Kcal/kg NAR).

Incidentally, India’s steam coal import in 2012 is estimated by Coal Insights and ICMW, its sister publication, at around 137 million tons (mt), of which around 95 mt was steam coal. Around 70 percent of this 95 mt is estimated to be high calorific value coal, with about 21.50 mt coming from South Africa alone, around 3 mt from the US and the balance from Indonesia (68 mt) and Australia (2.5 mt).

If the customs department strictly adhere to sub-heading of notification under Chapter 27, the import of bituminous coal in 2012 would stand at around 67 mt (70 percent of total around 95 mt).

Industry sources fear that though the

current problem is related only to import of US steam coal, it can be applied on imports of South Africa or Indonesia or Australia steam coal also.

“No consumer, including power plants would use imported coal unless it is economically viable and going by the current definition, even 5100-5300 Kcal/kg GAR Indonesian coal would be classified as ‘bituminous coal’ because the equivalent GCV would be around 5900-6000 Kcal/kg,” the industry sources said.

Bone of contention

Coal Insights understands there would have been normally no problem in paying CVD on high imported price because this could be offset with actual excise duty payable on their finished products, but there are many consumers who do not produce excisable products and for them the cost would be substantially high.

There would be another problem if the importers or consumers are asked to pay the CVD with retrospective effect.

A number of traders have already sold their imported material to consumers and also the actual consumers who might have directly imported high calorific value coal might have consumed not only the coal, but might have also sold their end products after taking advantage of CVD, the consumer said.

This move by the customs officials may lead to piling of huge stocks on ports, particularly on western coast ports of India through which a huge quantity of high calorific coal particularly from South Africa and the US is imported, said the source from Gujarat.

Conclusion

Unless there is a clarification from the customs department, the ambiguity in the classification of anthracite/bituminous coal might lead to a steep decline in India’s import of steam coal, particularly from the US, as this coal contains some properties of coking coal.

This, in turn, might affect India’s projected growth of 5.9 percent in GDP in 2012-13 as the industries would not be able to produce as per requirement because of lack of sufficient availability of domestic coal while power plants would also be not able to generate as per expectation.

Coal Insights, January 2013

33

Feature

CIL switches to BOO scheme for washeries, disappoints big players Coal Insights Bureau

I

n the face of inordinate delay in the setting up of new coal washeries in the country, Coal India Ltd (CIL) has decided to switch over to the build-ownoperate (BOO) scheme from the prevailing practice of build-operate-maintain (BOM) scheme, a top official of CIL said.

“In order to speed up the coal washery projects, we have decided to introduce the BOO scheme under which the entire project would be built, owned and operated by the selected vendor,” the official said.

Under the BOO scheme, the selected contractors would need to invest for the project and deploy personnel for operating the washeries once they are commissioned.

This makes CIL free of any investment, ownership and maintenance obligation.

In contrast, under the BOM scheme, the investment was to be done by CIL and the contractor has to build, operate and maintain the projects.

Incidentally, CIL had earlier tried to set up a few washeries on BOO basis and had also awarded contracts for four washeries to two different parties. But that scheme did not work and was scrapped later on.

Past imperfect

It was during the tenure of past chairman Partha S. Bhattacharyya, that CIL felt the need to come up with its own big washeries for non-coking coal beneficiation. The coal miner decided to build 20 new washeries with operating capacity of 111 million tons (mt).

To start with, the company floated a tender for 11 washeries which were to be set up on BOM basis. Under the scheme, the company was to invest funds, while the projects were to be built, operated and maintained by the EPC contractor.

34 Coal Insights, January 2013

However, as things turned out, some independent board members raised an issue relating to the perceived risk over the tender clauses. “They raised questions at the time of awarding the contract, on their own conditions laid down in CIL tender, the main tender itself. As a result of this, at least two projects – Basundhara and Jagannath – got scrapped,” industry sources said.

“The contracts for these projects (both were to come up under Mahanadi Coalfields Ltd or MCL) were awarded on the basis of cost and yield. The problem occurred when some members of the board (of MCL) Some of CIL’s washery projects Sl. No.

proposed

coal

Capacity (mtpa)

Name of washery

Company

1

Chitra

ECL

2

Sonepur Bazari

ECL

8

3

Patherdih

BCCL

2.5

4

Bhojudih

BCCL

2

5

Dahibari

BCCL

1.6

6

Ashok

CCL

10

7

Karo

CCL

2.5

8

Konar

CCL

3.5

9

Purnadih (Piparwar)

CCL

3.5

10

Baroud

SECL

5

11

Kusmunda

SECL

10

12

Basundhara

MCL

10

13

Hingula

MCL

10

14

Jagannath

MCL

10

15

Ib Valley

MCL

10

16

Wardha

WCL

5

Total Source: CIL

2.5

96.1

BCCL board approves L1 in Dahibari tender The board of Bharat Coking Coal Ltd (BCCL) has approved the award of the tender to the winning bid for the Dahibari washery tender.

“The board has approved it. We are in the process of sending the proposal to Coal India (CIL) board for its final clearance. We expect to award the tender by March 2013,” a company source told Coal Insights.

Altogether, five companies had bid for the Dahibari project which would have a capacity of 1.6 million tons per annum (mtpa). The price bids were initially scheduled to be opened by end of May, but the process was delayed for technical reasons.

Meanwhile, industry sources said Aryan Coal Beneficiation was likely to emerge as the winner from among the five companies who were in fray.

BCCL sources refused to comment saying, “Until and unless the winner is approved by the Coal India board, we cannot say anything.” raised questions as to what could be done if the yield is not achieved, or the project is abandoned midway, or if the project cost is not recovered. Such objection to the tender clause, despite the award of the contract to the lowest bidder, put the projects in limbo,” the sources informed.

In a bid to safeguard CIL’s interest, the board members cancelled the tenders, inserted a new clause and floated fresh tenders. The new clause made it mandatory for the lowest bidder to furnish a bank guarantee equal to the amount of the project cost. This came as a dampener for reputed players who are simultaneously involved in multiple projects across the markets.

“No big player would like to get his money blocked. One who is bidding for multiple projects at the same time has to deposit the earnest money for all of them, anyway. Over

Feature Installed capacities of washeries operating in India* Washery operators

Non-coking coal

Coking coal

Total

Nos.

Capacity

Nos.

Capacity

Nos.

Capacity

CIL

6

21.22

11

19.68

17

40.9

Non-CIL

28

75.10

7

10.01

35

85.11

Total

34

96.32

18

29.69

52

126.01

Source: Office of Coal Controller, Ministry of Coal, Energy Statistics 2011

and above this, blocking funds means poor business sense,” said an industry source.

As a result, the projects got delayed beyond the planned deadline. Even in cases where the contracts were awarded (Madhuban, Dugda, Patherdih and Ashok), there was hardly any progress in work at the ground level.

A double whammy

As if the bank guarantee was not enough, CIL’s new decision to switch to the BOO scheme came as a double whammy to these leading players.

“There are a number of shortcomings

*As of March 2010

of this arrangement (BOO). Under this scheme, CIL will not be involved in the investments. As a result, anybody and everybody who can offer the lowest cost and standard yield will become eligible. Due to the lack of fund exposure, CIL will also not be interested in inspection of quality of technology and equipment used by these contractors. This in turn will encourage the so called “fly-by-night” operators with outdated technology. In other words, this scheme would be a disincentive for the good players that have sound track record and proven technology support,” industry sources said.

Under this scheme, CIL will only be interested in getting the desired yield. “But what if the yield falls short? Well, the project owner may get away with paying penalty.

But what about the good coal that goes out along with the rejects? This will never be recovered,” they said.

There will be infrastructural problems too. Under the BOO scheme, the coal miner would allow the contractor to build the project on the former’s land whereby the cost of land would be ammortised. In other cases, the miner will help the winning bidder in land acquisition. “Now, what will happen if that project proves to be a non-starter or of inferior quality? How will that land be recovered?”

To drive home their point, the sources said that in a recent washery tender, a number of leading technology providers including L&T and MBE Coal and Minerals Technology had withdrawn their bids due to the BG clause. Similarly, in future, many of the leading established players would stay away from CIL tenders due to the BOO scheme.

Coal Insights, January 2013

35

Feature

India’s December power generation up m-o-m

was not provided by CEA. In hydro sector, the 33 MW came at Chutak HEP in Jammu & Kashmir (Units 1-3).

Following is the detail of capacity addition during the first nine months of 2012-13 and full financial year 2011-12 (in MW): Months

Coal Insights Bureau

I

ndia’s power generation in December 2012 stood at 76,525.80 million units (MU), up 4.96 percent from 72,906.27 MU generated in November, according to provisional statistics of the Central Electricity Authority (CEA).

The generation in November was significantly lower than the target of 79,904 MU, the data revealed.

Power generation in December 2011 or the corresponding month of previous financial year was 73,303.01 MU against the target of 71,241.60 MU, which implies yearon-year growth.

The country’s power generation during the first nine months (April-December) of 2012-13 stood at 683,752.90 MU, down 0.95 percent compared with the target of 690,306 MU for the period and up 4.64 percent compared with 653,446.25 MU generated during the corresponding period of 2011-12.

Of the total generation in December 2012, 67,301.76 MU (63,214.27 MU in December 2011) was from thermal sector,

2,635.94 MU (2627.89 MU) from nuclear sector, 6,484.19 MU (7,302.49 MU) from hydro sector and Bhutan imports was 103.91 MU (158.36 MU).

The actual generation was lower than the target of 68,767 MU for thermal sector, 3,145 MU for nuclear sector and 8,310 MU for hydro sector. It was also lower from 342 MU set for Bhutan import.

Capacity addition

A total of only 15 MW of power generation capacity was added in India during the month of December 2012 taking the total installed generation of the country to 210,951.72 MW, CEA data showed.

The capacity addition in November was 803 MW. With this total power generation capacity added during the first nine months of 201213 (April-December) stood at 9,854 MW, as per CEA’s revised data.

During December, capacity addition in the thermal sector stood at nil while the target for the sector stood at 2,695 MW. However, for the hydro sector 15 MW was added against the target of Categorywise energy generation in December 71 MW. In case of 2012 (in %) nuclear sector, target stood at 1,000 MW 8% 0% but achievement stood at nil.

3% During the month, 15 MW was added at Bhawani Kattalai BarrageIII (Unit-I) in Tamil Nadu by TANGEDCO. D u r i n g November, 500 89% MW was added at Indira Gandhi TPP unit 3 in Haryana, The rma l Nucl e a r Hydro Bhuta n I mport while the details of Source: Central Electricity Authority balance 270 MW

36 Coal Insights, January 2013

2012-13

2011-12

April

1760

735

May

1070#

550

June

2376

2224

July

950

1660

August

550

1200

September

870

786.5

1400

345

November

October

803

2807

December

15

1158

January

895

February

972

March

5482*

Total (Apr-Sept) Total (Apr-March)

9794

6369

9794##

18814.5*

*As reported by CEA, the capacity for 2011-12 was increased by them to 20501.70 MW instead of 18814.50 MW. # CEA had earlier reported that capacity addition in May (2012-13) was 1070 MW, but it appears that the figures have been revised to 1130 MW. ## As per the consolidated data provided by CEA, total capacity added during April-December 2012 period stood at 9,854 MW although addition of individual month’s capacity addition figure shows the total April-December capacity addition figure to be 9,794 MW.

Critical coal stock

Inadequate coal supplies by domestic coal companies and lower imports by power utilities have led to critical coal stock position at a number of Indian power plants.

According to data available with Coal Insights, a total of 34 plants of the total 90 in the country were faced with critical coal stock position of less than seven days as on December 30.

The data further shows that out of the 34 plants facing ‘critical coal stock’ position, 21 were facing ‘super critical’ coal stock position of less than four days.

On December 16, out of the 36 plants (out of 90 plants) facing critical coal stock position of less than seven days, 26 were facing ‘super critical’ coal stock position of less than four days. Plants in Maharashtra,

Feature

Achievement vs target in capacity addition (in MW) 3000

All India PLF in December 2012 (in %) 90 80 70 60 50 40 30 20 10 0

2500 2000 1500 1000 500 0

Therma l

Hydro Ta rget

Nucl ea r

Centra l

Achi evement

Sta te Sector Progra m

Source: Central Electricity Authority

Bihar, Tamil Nadu and West Bengal were the worst sufferers.

Plant load factor

The Plant Load Factor (PLF), a measure of the output of a power plant compared to the maximum output it could produce, for the country for the month of December 2012 stood at 73.12 percent against the planned 70.53 percent. The PLF was 70.94 percent, 70.9 percent and 61.58 percent for November, October and September 2012, respectively.

Pvt. Utl .

Sector

Al l Indi a

Achi evement Source: Central Electricity Authority

The PLF of power plants of central sector run companies such as NTPC and DVC in December 2012 stood at 84.54 percent whereas the figure achieved in November 2012 was at 80.08 percent. In December 2012, the plants in the state sector recorded a PLF of 67.68 percent against the planned 68.42 percent. The worst performers were Muzaffarpur TPS, Neyveli TPS II Exp. and BSEB, all of which recorded nil PLF against a target of 19.55 percent, 41.94 percent, and 17.34 percent, respectively.

Power supply position

In the month of December 2012, the country’s peak power demand was estimated at 128,689 MW, but actual availability was only 116,394 MW, reflecting a shortfall of 12,295 MU or 9.6 percent.

Despite acute power shortage, deficit stood at nil in Chandigarh, Daman &Diu, Lakshwadeep and Sikkim while peak power deficit was noticed in Andhra Pradesh which stood at 2,008 MW.

CIL signs supply linkages for double its expected output till FY17

C

oal India Ltd (CIL) has committed to supply around 600 million tons (mt) additional coal to the power plants that will come up between April 2012 and March 2017 (the terminal year of Twelfth Five Year Plan) even as its incremental production by then is unlikely to cross 300 mt, a senior official said.

“As of today we have provided linkages for 600 mt of coal, while the additional availability is hardly 300 mt or so in 201617. So there is a gap of 300 mt. In fact the gap is more than that or about 400 mt,” the official said.

The official pointed out that every time the linkage committee meeting took place till 2009, CIL had put on record

the details of their production, existing linkages, LoAs already issued and expected gap between demand and availability which was then envisaged between 250 mt and 400 mt.

The linkages were provided based on the assumption that all the big power projects would be sanctioned by 2011 and their COD will be December 2012, the official said.

“However, it has been found that the implementation of power projects were far below the commitments. However, if all the power plants had been commissioned as promised, then CIL would not have been in position to supply coal to them,” the official added.

It is perhaps for this reason that the government has not convened another meeting of Standing Linkage Committee (Long Term) after 2009 as it has realised that there is no coal available for supply, the official hinted.

CIL had realised that it will not be able to honour its supply commitments because of several problems being faced by it to increase coal production and as such it was forcing consumers to sign Fuel Supply Agreements (FSAs) in such a way that it will have to supply only 50 percent of the total requirement through its own sources.

The balance will be met through imported coal, the cost of which would be borne by the consumers, he added.

Coal Insights, January 2013

37

Feature

Indian paper industry battles slumping demand Sanjukta Ganguly

T

he Indian paper industry, which went through a boom phase even a few years back, is currently going through a lean phase with a sharp drop in demand.

Profitability has taken a hit and the subdued demand has affected the topline of some major manufacturers, while the increasing operational costs have put pressure on their margins.

However, the adverse conditions have not dampened the overall market sentiment and future growth expectations. A number of paper manufacturers are currently carrying out expansion plans or investing in new products or technology to achieve better product portfolio and efficient processes.

38 Coal Insights, January 2013

Capacity expansion

Some of the paper manufacturers are braving the demand conditions and indulging in capacity expansion to cater to future demand growth. According to reports, Chennai-based Seshasayee Paper and Boards is all set to merge SPB Papers, formerly Subburaj Papers which it acquired in February 2011. The acquired unit is located in Tirunelveli and has a capacity of producing 90,000 tons per annum (tpa).

This will add to Seshasayee Paper’s existing capacity of 115,000 tpa.

Meanwhile, JK Papers, a leading paper manufacturer, has announced the launch of new high-end products such as pigmented office paper and corrugated paper.

“We have set up a facility at our new plant coming up in Odisha to produce 2,700 tons of pigmented paper a month, which will totally substitute the imports. This grade of paper is seeing a growth of 15-16 percent annually,” an official said.

The company’s new plant is coming up beside its existing one in Odisha, involving a capacity of 165,000 tpa and an investment of ` 1,650 crore. The new plant is expected to go on stream in the first quarter of 2013-14, taking its total capacity to 455,000 tpa.

Another leading manufacturer, Tamil Nadu Newsprints and Papers Limited (TNPL) has commissioned a 300 tons per day de-inking plant to generate paper pulp from used paper. This has added to the company’s current capacity of 840 tons per day of bagasse, thereby eliminating the need to import costly pulp and thus safeguard from the volatility of the market.

The company has also embarked upon a plan to strengthen its raw material capacity by expanding its pulpwood plantation program.

It has taken up a project to complete over

Feature

HNL to import Indonesian coal Hindustan Newsprint Limited (HNL), a government of India enterprise, has floated a notice inviting tender (NIT) for procurement of 50,000 tons (+/-10 percent) of Indonesian origin coal.

The material to be procured should have a GCV of 5600 Kcal/ Kg, 22 percent total moisture, 10 percent inherent moisture, 8 percent ash, less than 1 percent sulphur, 4045 percent volatile matter whereas the size of the material should vary between 0-50 mm.

Delivery of the material should commence within 15 days of issue of the letter of intent (LOI)/Purchase order (PO). The last date for submission of bids was January 28, 2013.

1,00,000 acres of plantations this year. As of 2011-12, the company had brought over 82,000 acres under pulpwood plantation by involving more than 15,000 farmers. This gives the company over 276,000 tons of pulpwood annually, which is more than half its total requirement of pulp wood.

Alternative raw materials

The raw material costs especially of wood and wood pulp have almost doubled in recent past, mainly due to the expansion of plywood manufacturing companies. A Kolkata-based paper manufacturer said that his company has announced plans to use agri by-products such as ‘bagasse’ as feedstock.

The company has its only manufacturing unit in Saharanpur, Uttar Pradesh and produces nearly 80,000 tons annually. In 2011-12, the company reported a dip in sales to ` 239 crore from the previous year’s turnover of ` 270 crore.

“We are expecting this project to take shape in a year’s time and we are already talking to the local farmers for procurement,”

a company official said. The company targets 50 percent of its 100,000 tons of wood requirement to be replaced by bagasse. It is also considering investing nearly `70 crore as capex to make the units and machinery adaptable to bagasse, he added.

The increased raw material cost has resulted in significant price correction in the industry.

According to reports, JK Papers has recently announced a possible hike in its product prices for their uncoated paper segment.

The leading manufacturer of copier papers produces about 150,000 tons of non-coated paper products, with its total production capacity being 294,000 tons.

It has a 28 percent market share in the domestic copier paper segment, which is currently estimated at 551,000 tons.

In view of the current demand scenario and increased use of alternative raw materials by the paper manufacturers, how far the paper industry will be able to sustain its profit margins is to be watched.

Coal Insights, January 2013

39

special focus

“Sponge iron sector will see recovery only on revival in steel demand” Sanjukta Ganguly

W

ith overcapacity and skyrocketing input prices playing havoc with the sponge iron industry throughout the country, these are tough times for the manufacturers.

Amid such sluggish market conditions, only change of policies can provide some ray of hope, said senior vice president, marketing & corporate affairs, Monnet Ispat & Energy, Amitabh S. Mudgal, in a candid interview to Coal Insights.

Excerpts: India produced 22 million tons of DRI in 2011, a drop of 1.45 mt or 7 percent from 2010. But the country still remains the world’s largest producer by a wide margin. What are the main factors for the drop in production? What will be the production in 2012?

The Indian sponge iron industry witnessed continued growth in the last decade. It has grown at a CAGR of 16.5 percent between 2004 to 2010 while the growth in the world has been at 4.31 percent only during the same period which led to a major difference in the DRI production year by year.

Today India is contributing about 33 percent to the world’s total DRI production of 73.32 million tons (mt) at 21.9 mt, followed by Iran’s 10.37 mt and Mexico’s 5.85 mt in CY 2011. This tremendous growth was mainly because of abundant availability of iron ore and non-coking coal along with the demand for finished steel in India.

The DRI industry in India, however, is now at a critical juncture. The

40 Coal Insights, January 2013

industry has been adversely affected by non-availability as well as rising price of raw materials like iron ore, coal and gas. Also, the demand for finished steel has dropped and is not able to keep pace with the rising cost of inputs, putting negative pressure on the bottomline. We expect to close CY 2012 at approximately 18 mt only.

What is India’s current DRI production capacity? How much of the production capacity is being utilised at present?

What are the reasons for current low capacity utilisation?

The current DRI production capacity in the country is 35.3 mt while the utilisation is about 60 percent in 201112, down from 66.56 percent in 2010-11.

As I already mentioned, non-availability of iron ore, non-coking coal and gas resulted in depressing performance of sponge iron plants.

The recent closure of iron ore mines in the states of Karnataka, Goa and Odisha, has been the proverbial nail in the coffin. As per information available, 80 percent of the sponge iron units are closed in the state of Karnataka only.

Similarly units in other states are also suffering from raw material scarcity, price rise and sluggish market.

What is the current cost structure for coal based and gas based producers?

The cost of sponge iron is directly proportionate to the landed cost of iron ore and coal/gas being used.

The cost structure differs, depending upon various factors like source of raw material – captive/imported, quality and quantity of raw material and distance from mines and the port.

Some small kiln producers are using iron ore fines and low grade coal. Their cost will be very low compared to an established plant using lumps and good grade of coal.

Government restrictions made iron ore and natural gas supplies to the sponge iron sector difficult. Do you agree?

Yes, there is an acute shortage of raw material. Sponge iron producers are dependent on the private miners or PSUs like NMDC and OMC for supply as most of them are not allotted captive mines and are compelled to pay high prices. Today all the coal and gas based plants are suffering from nonavailability of iron ore.

Private mines production in Karnataka, Goa and Odisha have dropped significantly while PSUs like NMDC continue to focus on their long term export commitment. OMC in Odisha has restrictive sale quantity for within and outside the state.

Coal as we all know is in short supply and only 50 percent of FSA quantity is made available to sponge iron producers. In case of natural gas, the government has given priority to the power and fertiliser sectors. Further these units are unable to use imported LNG because its prices are four times higher than the prevailing domestic prices.

What are the main problems being faced in procurement of coal or gas?

Sponge iron is not in the priority list of the government of India. Coal is allocated by the way of captive blocks/ linkages and companies which do not have captive source or FSA are bound to use imported coal.

Recent policy changes in Indonesia to encourage domestic uses and depreciation of the rupee has restricted the option of imported coal too.

Similarly, gas based units are also not able to utilise the installed capacity and are operating at 53 percent level, as the government has cut the supply of gas to 1.86 MMSCMD from assured supply of 5.46 MMSCMD from D6 of Krishna Godawari basin and diverted it to the power and fertiliser sectors.

SPECIAL FOCUS India has become the leading producer of DRI over the past decade due to production in a large number of small coal based rotary kilns. However, the need for better quality DRI is driving shaft furnace alternatives such as MXCOL® and Corex/Midrex. Do you agree?

By all means we must encourage new technology to make the process fast and more economic without compromising the quality. Present technologies available are also competent enough to produce good quality DRI though they are restrictive in terms of use of iron ore fines that are abundantly available.

Any technology which can use iron ore fines as direct feedstock should be encouraged. More R&D should be done in uses of fines and inferior grade coal.

It is also said that coal-based sponge iron has some inherent disadvantages like high phosphorus that affects the quality of steel. What is being done or should be done to overcome this problem?

It will not be appropriate to say that coal-based sponge iron has disadvantage of high phosphorus. The phosphorus content in DRI is totally dependent on the quality of iron ore

Any technology which can use iron ore fines as direct feedstock should be encouraged. More R&D should be done in uses of fines and inferior grade coal.

being fed in the kiln and not on the process itself. More and more iron ore beneficiation plants is the requirement of the day to reduce phosphorus content in iron ore feed into the kiln.

With smaller amounts of natural gas anticipated for industry use, coal-based technology options are currently being pursued by a few India steelmakers.

What is the status of these projects?

Currently India has 25.79 million tons (mt) of coal-based and 9.6 mt of gasbased installed capacity of sponge iron.

The gas-based route of production has remained confined to the existing three units only due to non-availability of gas, and since there is no new source of gas, the growth of gas-based plants is not expected and we are left with the coalbased route only.

Many new projects of 1-3 mt capacities of steel like Bhushan, JSPL and Monnet have come up using DRI and hot metal route.

What are the prevailing domestic market prices? Where are the prices headed currently? Is production growing or receding?

Currently the prices stand at `20,000 per ton ex works and are at rock bottom. Any improvement in finished steel demand cycle will enable price to improve.

Does your company have any expansion plans?

Monnet Ispat & Energy Limited (MIEL) is India’s second largest sponge iron manufacturing company with an annual

production of 1 million tons per annum (mtpa) from its ISO 9001-2000 certified integrated plants at Raipur and Raigarh in Chhattisgarh.

Our BF & EAF are getting commissioned now at Raigarh which will increase the steelmaking capacity of the group to 1.8 mtpa in 2013-14. A greenfield unit is coming up at Angul, Orissa that will ramp up the steelmaking capacity to 3.5 mtpa by 2014-15 through DRI and hot metal route.

What do you think would be a longterm solution to your problem and that of industry in general?

There has been so much of political hue and cry on the issue of FDI in retail. While FDI is a welcome step, we as a country are ignoring that we are actually losing a big chunk of foreign exchange in terms of cost of imports.

While India has the fourth largest coal and fifth largest iron ore reserves in the world, we still import about 100 mt of coal in 2011-12. The total expenditure incurred on import of coal during the last three years is $32 billion. Similarly we have imported 20 mt steel in the last three years with an outgo of $17 billion.

The time has come for our ‘thinktank’ to plan policies which can be implemented in synergy with the states to augment growth of industries.

We must immediately open our mining industry. It will not only attract FDI but will increase production, thereby making raw materials available in abundance at a much lower price and will also stop the outgo of foreign exchange on account of import.

Coal Insights, January 2013

41

OPINION

2013 to be slow amid mixed signals from India: Sandvik Coal Insights Bureau

S

andvik Mining is a leading global supplier of equipment and tools, service and technical solutions for the mining industry, and their products span the entire range including rock drilling, rock cutting, rock crushing, loading, hauling and material handling.

Sandvik AB subsidiary Sandvik Asia Ltd has its headquarters in Pune and manufacturing units in five places. President of Sandvik Mining India, Soumitra Banerjee, talks to Coal Insights on the company’s focus areas in India as well as its outlook for the new year.

Excerpts: How has the year 2012 been for Sandvik Mining, globally and in India? What is the outlook on 2013?

In 2012, despite the economic uncertainties Sandvik Mining globally achieved its budgeted revenue targets.

2013 would be even more challenging and if we can achieve 8 to 10 percent growth in topline, it will be a very reasonable performance considering the outlook.

In India, the revenue performance is approximately 20 percent below the target as the new mining projects did not come up as per expectation.

This is particularly true for coal and underground hard rock greenfield projects. Iron ore was also extremely weak due to ban on mining in major

states like Orissa, Karanataka and Goa. The year 2013 does not look very bright for the industry as a whole.

Globally we expect to see a slowdown this year. The prospect for the Indian market looks a little uncertain. But we are hopeful and expect to see some improvement, going forward.

For Sandvik, which are the focus areas in India? How does coal figure in your portfolio?

Our major strength in the Indian mineral sector is on iron ore and underground hard rock. Our presence in coal is not much right now. Majority of our revenue is from underground hard rock and iron ore and the related after market.

In coal, we do not have any presence in surface and load haul segments at present. Instead, our focus is on underground for continuous mining in Bord and pillar operations and development work in Longwall mining.

In other words, in the Indian mining sector, currently we are not covering the entire segment. Our entire product range would come when the market opens up. As of now, imports are sourced from Finland and Sweden.

We have manufacturing plants in India for rock tools, but not for mining equipment as such.

Your focus seems to be on the underground segment. What are your expectations about the growth in underground coal mining in India?

Developing an underground coal mine takes time. Also, in India the average

This high cost of mining is a very common argument against underground mining in the country. But we need to understand that cost comes down dramatically once we take up mechanisation.

42 Coal Insights, January 2013

production level from underground coal mines is low as compared to opencast coal mines. On an average, an underground mine produces Soumitra Banerjee, 2 to 3 million President, Sandvik tons (mt) of Mining India coal per annum while that of opencast mines could be 10 to 30 mtpa.

This, however, does not mean there is no future for underground mining in the country. In fact, Coal India Ltd (CIL) and also the private block allocattees are focusing on a number of underground blocks which will come up for production in coming years. It takes at least 3-4 years to develop an underground block and bring it to production stage. Although underground mining requires much less land area, compared with the opencast method, getting forest and environment clearances pose a huge impediment.

Besides the long delay, there is another concern about underground mining in India – the high cost of mining. Cost of underground mining is indeed very high here.

This high cost of mining is a very common argument against underground mining in the country.

But we need to understand that cost comes down dramatically once we take up mechanisation. In countries like Australia and South Africa, there is very high level of mechanisation. But in India, it is still very labour intensive.

What is your reading of the current scenario in coal and iron ore mining in the country?

There are mixed signals coming from India. Some people have invested heavily on captive coal blocks. This had both positive and negative effects. There were alot on controversial things, but also some positives coming out of it.

Currently, iron ore is an area of concern for us. As I said, a sizeable

OPINION chunk of our revenue comes from this segment. Goa has stopped exports altogether. Production has been affected substantially in Karnataka. The progress of captive blocks is very slow.

In Odisha, steel mills are affected due to various government notifications restricting mining of ore in the state.

Overall, the Indian government is working on various policy initiatives to properly develop the mining sector. But the speed of such policymaking is very slow.

What is your level of presence and turnover in India?

Our mining equipment revenue from India is around `250 crore.

Besides, Sandvik has presence in materials technology, tubes used in fertilizer, machining and tooling in India.

For these we have five plants. Sandvik’s India subsidiary Sandvik Asia Ltd has its headquarters in Pune and manufacturing units in Pune, Mehsana, Hosur, Hyderabad and Chiplun. The company has its research and development centre

in Bangalore. Its businesses in India include materials technology, tooling, mining and construction equipment.

Overall, Sandvik has its presence in India for nearly 60 years now. Our total turnover from the Indian operations is around `2,600 crore.

What is your current market share in India?

In India, competition is intense. There are a number of international players present in the mining equipment sector.

Almost everybody is affected due to the slow progress in the country’s mining sector. This includes Metso, Caterpillar and Terex. India accounts for around 2 percent of our global turnover. The major markets are Australia, South Africa and Canada. Russia and CIS countries are coming up and Sandvik is doing a lot of work in those countries.

What is the scenario in the Chinese market?

In China, we are seeing a slowdown in

both the segments of construction and mining equipment. The Asian market is also a little subdued due to the Chinese market condition.

Due to Chinese slowdown, Australian miners supplying ore to that country are facing problem. Also, coking coal imports by the country was down in 2012 and this affected companies like Rio Tinto.

In our case, China’s share in our global turnover is around 7-8 percent.

We have a manufacturing set up in that country. Besides, Sandvik mining has manufacturing facilities in France, Sweden, Finland and Australia.

Lastly, what was the impact of the recent split of Sandvik’s global mining and construction divisions?

The objective of this split was to gain increased customer focus. Today, aftermarket demand from these two divisions is entirely different and we are already reaping the benefits of the increased focus.

Coal Insights, January 2013

43

ROUNDUP

The year that was: India

T

he year 2012 has seen some dramatic changes in the Indian coal industry. The shortage in domestic coal supply accentuated prompting the coal ministry to take desperate measures which included the signing of fuel supply agreements (FSA) with power utilities, consideration of price pooling to mitigate the impact of high cost imports and installation of a coal regulator to ensure fair practices in the coal market. However, at the end of the year, it was found that many of these initiatives were still awaiting implementation.

In 2013, the industry expects the coal shortage to remain a concern, despite growth in production by Coal India Ltd, the country’s major supplier of the dry fuel. However, some of the developmental initiatives taken by the ministry in 2012 are likely to come to fruition and may benefit the consuming sectors. With continued growth in production, the offerings in e-auction would also rise. On the international front, the import prices are likely to remain largely soft in the first half of the year. If the Indian currency remains range bound vis-à-vis US dollar, this may lead to increased imports.

Meanwhile, the major developments witnessed in 2012 are summed up below:

Shift to GCV based pricing The year started with a hue and cry over Coal India’s (CIL) shift from Useful Heat Value (UHV) based pricing of coal to Gross Calorific Value (GCV) based pricing.

In line with previous announcement by the ministry of coal (MoC), the new system came into effect on January 1, 2012. CIL assured that the shift would be largely revenue neutral.

The empirical relationship of GCV and UHV could be found in the following formula: GCV = (UHV + 3,645 – 75.4 M)/1.466 (GCV and UHV expressed in kCal/kg and M denotes the percent moisture.)

The stakeholders – miners, traders and consumers – were unanimous about the justification of the shift as GCV based pricing is the system practiced internationally. However, there was huge opposition from the consumers due to a significant increase in coal prices. The Coal Consumers Association of India (CCAI) alleged that coal prices had been increased on an average by 61%. This had significant implication on the users segments, including power, cement and sponge iron, among others.

Also, there was concern about the preparedness of CIL and Singareni Collieries Company Ltd (SCCL) to jump to the new ways of gradation and sampling. The absence of adequate number of Bomb Calorimeter, a

44 Coal Insights, January 2013

vital instrument for determining the actual GCV value of coal, at individual collieries was sighted as a major infrastructural constraint. CCAI demanded a roll back of the decision.

The collective opposition forced the MoC to step in and take corrective steps. Subsequently, the coal prices were reviewed downwards, and the new system was kept under observation. There however was no further revision in prices in following months. But the complaints over grade slippage and lack of instruments at collieries continued till the end of the year.

ROUNDUP Revision in royalty rates In a move aimed at inflating the coffers of coal-bearing states, the Cabinet Committee on Economic Affairs (CCEA) approved the proposal for adoption of ad valorem regime for charging royalty on coal and lignite.

The new rate, which was announced on April 12, 2012, replaced the hybrid formula that was in vogue.

As per the recommendations of the study group, constituted by the ministry of coal for revision of royalty rates, the new ad valorem rate was decided at 14 percent for coal and 6 percent for lignite, excluding taxes, levies and other charges.

Earlier, the royalty was being charged on fixed rate, plus 5 percent of basic pithead price of run-of-mine (ROM) coal. The fixed rate used to vary from a low of `55/ton for F and G grade coal to `180/ton for Steel Grade 1 (coking coal). The royalty was `90 plus 5 percent for C grade coal and `130, plus 5 percent for A and B grade coal. The royalty on lignite was `45, plus 2 percent of basic pithead price of run-of-mine lignite.

The proposed royalty revision was not to be extended to the state of West Bengal unless the cesses imposed, are withdrawn. For states other than West Bengal that levy cess or other taxes specific coal bearing lands, the revision of royalty allowed was to be adjusted for the local cesses or such taxes so as to limit overall revenue to the ad valorem royalty yield.

The approval of ad valorem regime of royalty for coal by CCEA was expected to lead to increase in the price of higher grade coal, used by industries like sponge iron and cement. On contrary, the prices of lower grade coal that is mainly used by power sector was expected to remain largely unchanged.

The implementation of the above revised rates of

royalty on coal and lignite is expected to provide coal and lignite bearing states reasonable share of the income earned by mining, production and selling of these minerals.

The major coal producing states is estimated to earn revenues of about `6,980 crore in place of `5,950 crore, earned at previous rates, resulting in increase in combined earning by more than `1,050 crore.

Rao becomes new CIL chairman S. Narsing Rao, a 1986 batch IAS, took over as chairman and managing director (CMD) of CIL with effect from April 24, 2012, filling up a post that was being run by acting chairmen since P.S. Bhattacharyya’s superannuation in February 2011. He succeeded Zohra Chatterji, IAS, Additional Secretary to Government of India, Ministry of Coal, who held additional charge as CMD of CIL since February 1, 2012.

Prior to assuming charge at CIL, Rao was CMD of SCCL since September 2006. As CMD of SCCL, a joint venture between the government of Andhra Pradesh and the Central government, Rao catapulted the company from a production of 36 million tons in 2006 to 53 mt in 2011-12, thereby placing SCCL on a high growth trajectory of 9 to 10 percent from a mere 2 to 3 percent. It was during Rao’s tenure that SCCL

experienced its first ever strike free year in 2007-08 and also experienced substantial productivity gains.

While the industry largely welcomed his selection

Coal Insights, January 2013

45

ROUNDUP from among a swath of candidates, Rao kept up to his promises by reinstating the coal monolith on the growth path. After two successive years of flat growth, CIL witnessed over 6 percent growth in coal production during the first half of the current year (2012-13).

Going by the current trend, the company is expected to see around 6-8 percent growth by the end of the year.

Other than increasing production, the new chairman took some decisive steps to engage mining developers and operators (MDOs) to boost performance. He has also been instrumental in augmenting the logistics services and increasing offtake of coal from pitheads.

Going forward, CIL expects to achieve significant growth in production and reach 615 mt by 2016-17 from 435 mt in 2011-12.

CAG report and coal scam At a time when the domestic coal sector was returning to the growth path, the Annual Performance Audit report by the Comptroller & Auditor General (CAG) dealt a heavy blow to the country’s coal fraternity.

Apparently probing into the coal shortage facing the economy, the report delved into the coal production matrix and allegedly found gross anomalies in the government’s way of allotting captive coal blocks to private companies. The free allocation of such blocks, the draft report claimed, had resulted in a windfall gain of Rs 1,067,303 crore (or $194.25 billion). Later on, however, this figure was reworked in the Final Report tabled in Parliament as Rs 185,591 crore ($33.78 billion). CAG did not implicate the government in charges of corruption but alleged that the free allocation (barring the exploration cost which was recovered) had resulted in huge loss to the exchequer.

Instead, the government could auction the blocks, it suggested.

The government, from the very start of the controversy, opposed the observations. The coal ministry as well as the Prime Minister’s Office maintained that the free allocation was made to help the industry cope with their increasing coal

requirement.

However, the government, in the face of political pressure from the opposition parties, agreed to order an enquiry.

Subsequently, the Central Vigilance Commission (CVC) took up the matter and directed the Central Bureau of Investigation (CBI) to probe into the allegations. The CBI, on its part, named a dozen Indian firms which alleged involved in fraudulent activities to get the free allotment of blocks.

Meanwhile, on the basis of internal review, the MoC deallocated a few blocks held by private companies, citing the delay in development of the blocks allocated.

However, the auction part remained held up due to procedural delays.

Discom bust The accumulated losses of power distribution companies (discoms) resulted in a major crisis threatening to derail the ambitious power sector growth of the country.

According to reports, the total losses incurred by discoms shot up to around `200,000 crore in 2012 with five states – Tamil Nadu, Rajasthan, Uttar Pradesh, Madhya Pradesh and Punjab – accounting for around 70 percent of this amount. These losses, as seen from official records, have piled up over the years. And although the estimates vary from time to time, the figures nevertheless showed a steep uptrend all through.

The said crisis had its genesis in the low tariff structure, delayed payment of state subsidies, increased fuel costs and high transmission and

46 Coal Insights, January 2013

distribution (T&D) losses. The situation turned worse in late 2012 when the banks and financial institutions decided to stop working capital loans to discoms.

Earlier, the central government in 2001-02 provided a special financial package to save

ROUNDUP the state discoms from collapse when some state electricity boards defaulted on payment to state utilities such as NTPC and NHPC. The issue was also addressed by the Electricity Act 2003 which identified low tariff as one of the key reasons for the poor health of discoms. It further said that the discoms should run on commercial principles so that the sector gradually becomes self-sustainable. However, the states failed to take a lesson and continued with the populist measures.

With the massive default by discoms threatening to impact the banking and financial sector, the Union Cabinet in September 2012 approved the proposal to restructure debt worth nearly `200,000 crore of discoms. As part of the scheme, state governments are to take over 50 percent of their short-term liabilities. A power ministry release announcing

the scheme for “Financial Restructuring of State Distribution Companies (discoms)” said, “50 percent of the outstanding short term liabilities up to March 31, 2012, to be taken over by State Governments.

This shall be first converted into bonds to be issued by discoms to participating lenders, duly backed by state governments’ guarantee.”

State governments are to take over liability from discoms in the next two to five years by way of special securities, repayment and interest payments.

The balance 50 percent short term loans are to be restructured by rescheduling loans and providing moratorium on principal and at the best possible terms of interest. The scheme remained open up to December 31, 2012, and was made available for all participating state-owned discoms.

Coal Sector at a Glance Production & offtake India’s coal offtake during April-November 2012 stood at 360 mt, around 95 percent of the target set for the period.

Overall, the coal offtake during the first eight months of 2012-13 registered 7.8 percent growth over the corresponding period of the previous year.

The coal offtake to power during April-November, 2012 from CIL and SCCL has been about 237 mt, indicating an achievement of 92 percent of the target for this period and registered a growth of 12 percent over the corresponding period of the previous year.

India’s coal production during Apr-Nov 2012 (in mt)

60 40 20 0

Apr May June July Aug Sept Oct Nov 2011-12

2012-13

Imports up 11.7% India’s import of coal and coke in 2012 through 30 major and non-major ports rose by 11.76 percent compared with 2011, driven largely by a spurt in imports of steam coal and petroleum coke, according to a provisional compilation based on data received from customs, shipping companies, port officials and monitoring of vessels positions at various ports.

The country’s import of coal and coke stood at 135.11 mt in 2012 (+/-2%) compared with 120.89 mt imported in 2011, the compilation revealed.

Of the total import of 135.11 mt in 2012, steam coal accounted for as much at 94.78 mt, up 11.92 percent from 84.68 mt imported in 2011.

The import of coking coal stood at 32.28 mt

Coal and coke imports in 2012 and 2011 (in mt)

100

84.68

94.78

80 60 40

30.03 32.28 6.18 8.05

20 0

Coking coal

Steam coal 2011

Others

2012

Note: Others include anthracite coal, petroleum coke, met coke and PCI coal; For 2012, the figure for December is provisional.

Coal Insights, January 2013

47

ROUNDUP showing an increase 7.49 percent over 30.03 mt imported in 2011 whereas import of petroleum coke (both calcined and fuel grade) surged by 46.78 percent to 3.80 mt in 2012 from 2.59 mt imported in 2011.

Meanwhile, import of coal and coke during the first nine months (April-December) of 2012-13 is estimated

at 103.23 mt, up 12.62 percent compared with 91.66 mt imported during the corresponding period of 2011-12.

The import of coking coal during April-December 2012 is estimated at 24.64 mt, steam coal at 72.27 mt, anthracite coal at 0.71 mt, petroleum coke at 2.93 mt, met coke at 1.63 mt and PCI coal at 1.08 mt.

Power Sector at a Glance Capacity & generation

Capacity addition during 2012-13 (in MW)

Total power generation capacity added during the first eight months of 2012-13 (April-November) stood at 9,839 MW, as per CEA’s revised data.

During November, 770 MW was added in the thermal sector while the target for the sector stood at 1473 MW. However, for the hydro sector 33 MW was added against the target of 71 MW. In case of nuclear sector, both target and achievement stood at nil.

During October, the entire capacity of 1400 MW was added in the thermal sector while the target for the sector stood at nil.

3000 2000 1000 0

Apr May June July Aug Sept Oct Nov 2011-12

2012-13

Installed generation capacity as of November 30, 2012 (in MW) All India MW

Thermal Coal

Gas

Diesel

Total

120,873.38

18,903.05

1,199.75

140,976.18

Nuclear

Hydro

Renewables

Total

4,780

39,324.40

25,856.14

210,936.72

Break-up of thermal power capacity

Break-up of total installed capacity by segments

0.6 9

12.3 18.6 66.8 57.3

Coal

Gas

Diesel

2.3

Thermal

Nuclear

Hydro

Renewables

Note: 1) As reported by CEA, the capacity for 2011-12 was increased by them to 20501.70 MW instead of 18814.50 MW. 2) CEA had earlier reported that capacity addition in May (2012-13) was 1070 MW, but it appears that the figures have been revised to 1130 MW. 3) As per the consolidated data provided by CEA, total capacity added during April-November 2012 period stood at 9839 MW although addition of individual month’s capacity addition figure shows the total April-November capacity addition figure to be 9779 MW.

48 Coal Insights, January 2013

in focus

Major Indian refiners despatch 78 rakes of pet coke in December

Coal Insights Bureau

I

ndia’s major refineries – Reliance Industries Ltd (RIL), Essar Oil and Bharat Oman Refineries (BORL) – had despatched a total of 78 rakes of petroleum coke (fuel grade) to various consumers during the month of December, according to information provided to Coal Insights by an industry source.

The despatches in December stood at 82 rakes, if four rakes from Bhatinda refinery of Hindustan Petroleum Corporation Ltd (HPCL), is considered.

The despatches in November stood at 79 rakes by the above refineries, excluding HPCL’s Bhatinda, while that in September and July stood at 62 rakes and 77 rakes respectively.

Of the total despatches in December, 57 rakes were despatched by RIL from its SEZ (49) and domestic (8) sidings, 25 rakes by Essar and four rakes by BORL from its Bina refinery.

One rake usually carries around 3600 tons of pet coke, but in recent months it was found that RIL was loading up to 3700 tons of material, the source said.

The despatches by RIL stood at 45 in November and at 36 in September. Essar had despatched 28 rakes in November and

another 18 in September while BORL had despatched 6 rakes in November and 8 rakes in September.

In December, RIL had despatched 49 rakes from its SEZ siding (38 in November) and 8 rakes (7 in November) from domestic siding.

Of the total despatches of 57 rakes in December by RIL, 21 rakes went to Shree Cement, 9 rakes to J K Lakshmi Cement, 6 rakes to Binani Cement, 4 to Mangalam Cement, 3 rakes to Saurashtra Cement, 1 rake to Ambuja (Chattisgarh), 3 rakes to Ambuja (Rajasthan), 2 rakes each to Aditya Cement, Lafarge Cement and Tata Chemicals; and 1 rake each to Grasim (Nagda), Birla Corporation and Vikram Cement.

One rake was despatched by RIL for delivery in Nepal in December.

Of the 25 rakes despatched by Essar in December, 20 went to Shree Cement and one each to Jindal Steel & Power, Saurashtra Cement, Hindustan Electrographite, Ambuja Cement (Rajasthan) and Heidelberg Cement.

Of the four rakes of BORL in December, two went to Century cement and one each to Shree Ram Fertilizer and Maihar Cement.

All the four rakes from Bhatinda refinery of HPCL went to Ambuja Cement (Himachal).

International pet coke prices ease

The prices of petroleum coke in international markets fell slightly in December 2012 but any further decline appears highly unlikely, an official of a leading consumer of the material in India said.

“The prices of pet coke in the international markets have been ruling soft for a pretty long period and any further fall appears highly unlikely as further downside in demand is unlikely whereas any new capacities are unlikely to come in near future, except Motiva’s in the US,” he said.

The price of high sulphur (6-7 percent) and HGI of over 50 petroleum coke, which was quoted at around $94-$95/ton cfr India as on December 5 was quoted at around $93/ ton cfr India as on January 4, despite slight weakness in freight rates from around $34/ ton (Panamax) as on December 5, 2012 to around $32/ton as on January 4, 2013, the official said.

Earlier, in December it was expected that international prices would fall in view of the reports that Motiva Enterprises planned to re-start its new crude unit at its flagship Port Arthur refinery in Texas during the middle of the month.

However, till the first week of January, 2013 it was not clear whether Motiva was able to finally re-start production at the refinery.

A Motiva spokeswoman was quoted as saying on January 3 that the company expects the new unit to commence production in early 2013. Reports suggest that Motiva has planned to have the refinery up and running

by February.

“The commencement of production by Motiva is expected to bring in additional production of pet coke in the system,” sources said.

Similarly, expected commissioning of MRPL’s refinery in India in April-June is also likely to bring in additional about 2000 tons per month of pet coke in the domestic market, they said.

“But prices are unlikely to fall further, either in the domestic market or in the international market because of continued moderate demand,” they added.

Meanwhile, leading Indian refiners have rolled over their basic prices of petroleum coke for despatches in January 2013 at December 2012 levels.

Coal Insights, January 2013

49

Corporate

Coal India likely to report marginal decline in Q3 net: analysts

Tamajit Pain

C

oal India Ltd (CIL), the only mining company in the Sensex, is likely to report a decline in net profit in the third quarter (Q3) of 2012-13 (OctoberDecember) as margins are expected to contract mainly due to higher staff costs and lower e-auction realisation, according to analyst estimates.

The company is expected to report a 5.8 percent decrease in its consolidated net profit to Rs 3,808 crore in the third quarter, down from Rs 4,043 crore in the corresponding period previous year, brokerage result previews showed. As stated above, much of this fall is attributed to a general hike in wage costs which resulted from the wage negotiations in 2012. As for e-auction realisation, the average premium over notified price has been lower all through these months (since April) compared to a year ago.

The consolidated net sales revenue is, however, expected to rise 5.5 percent to Rs 16,190 crore during the October-December period, up from Rs 15,349 crore in the corresponding period previous year due to higher volumes, it showed.

Analyst estimates showed the earning per share (EPS) of the company would rise

50 Coal Insights, January 2013

marginally to Rs 24.7 in 2012-13, up from Rs 23.4 in 2011-12.

Most of the brokerages have kept a neutral rating to Coal India’s shares and expects the total sales during 2012-13 to be around Rs 66,666 crore. Operating profit margins are expected to be around 25.7 percent in 201213, while the return on equity would be around 33.1 percent.

During the third quarter, fuel availability position of power stations remained constrained. As on December 26, 2012, 34 thermal power stations had coal stocks for less than seven days which includes 22 power stations having coal stocks for less than 4 days. The western region was worst affected with 14 stations having coal stocks for less than seven days. The main reason for lower coal stocks can be attributed to lower domestic production as well as transportation constraints, analyst reports said.

Financial performance of CIL (Rs crore) Q3 FY13 (projected)

Q3 FY12

Growth (%)

Net sales

16,190

15,349

5.5

Net profit

3,808

4,043

(-)5.8

EPS (Rs)

24.7

23.4

5.5

The shortage in domestic coal forced power companies to continuously import coal and the decrease in the imported coal prices augured well for them.

During the third quarter, average prices of New Castle Mckloksey 6,700kc coal decreased by 27.1 percent year-on-year and 3.5 percent quarter-on-quarter to $83 per ton. In rupee terms, coal prices were down by 22.5 percent year-on-year and 5.2 percent quarter-on-quarter to Rs 4,492 per ton, the reports said.

Similarly, cement makers continued to be reliant on imported coal due to domestic coal shortage. The continuous fall in imported coal prices in the last few quarters augured well for cement companies also, reports suggested.

However, during the quarter there was a concerted effort by the Railways to optimise coal supply to power plants under pressure from the government. Railways tried hard to touch a record 200 rakes of coal a day to plants.

Sources said since November the Railways had been managing its rolling stock to clock 175 rakes per day from the usual average of around 157. In fact, Coal India’s pit-head stock has now decreased from 70 million tons (mt) in April to 43 mt in November, a 40 percent fall.

However, going forward, India’s coal imports may rise helped by a spurt in heating demand due to a severe cold wave and production shortage in domestic front.

Trade sources said imports have been on the rise since October to meet the higher energy demand during winter. The trend is expected to get a big push in the first quarter (January-March), aided by the current cold conditions.

India imported 90 mt of thermal and coking coal between April and November, up 26.8 percent from a year earlier. The trend indicates that India could import about 100 mt of thermal coal alone in this fiscal year.

Meanwhile, Coal India is expected to achieve its targeted production of 464.1 mt of coal in the current fiscal. According to company sources, the company was on target until the middle of January 2013 and expects the fourth quarter production to compensate for the shortage in the third quarter. Overall, India’s coal ministry expects domestic production of 574.40 mt in 2012-13, up 6.4 percent from a year earlier.

CORPORATE

Gujarat NRE posts higher Q3 net despite sharp fall in met coke prices Coal Insights Bureau

I

n what appears to be baffling for a section of the merchant coke industry, Gujarat NRE Coke Ltd, claimed to be the largest manufacturer in India, has managed to report a substantial increase in its third quarter (October-December, 2012) net profit and income from operations despite a sharp fall in revenues from its steel business.

“The increased income and profit is a bit surprising because metallurgical coke prices had fallen significantly since October 2011 from a peak of $410 per ton to recent lows of around $287 per ton in December 2012,” industry sources said.

The company has reported a net profit of `20.12 crore for the third quarter of 2012-13 compared with a net profit of `16.72 crore during the second quarter (July-September) and a profit of only `1.90 crore during the third quarter of 2011-12.

The net income from operations during the third quarter of current financial year stood at `527.11 crore, higher than `331.83 crore posted in the second quarter and ` 335.57 crore reported for the third quarter of 2011-12.

“The increased profit and income from operations announced by the company for the third quarter of 2012-13 came at a time Gujarat NRE Coke financial results (` crore) Q3 FY13

Q2 FY13

Q3 FY12

Net sales from operations

527.11

331.83

335.57

Total expenditure

413.82

238.17

251.72

Profit before tax

31.87

25.41

2.77

Net profit

20.12

16.72

1.90

EPS (`)

0.34

0.29

0.03

when the price of met coke dropped by nearly 10 percent during the quarter. Prices have fallen from a high of around $320 per ton as on October 1, 2012 to a low of around $288 per ton as on December 31, 2012,” they said.

“The announcement of increased profit

by Gujarat NRE Coke on the back of high income from operations is amazing, especially at a time when met coke prices remained highly depressed and the demand from steel makers was extremely low,” the sources said.

Surprisingly, with the gradual fall in market price of met coke and weakness in demand from steel makers, the income from operations of Gujarat NRE showed a contrasting trend, they said.

“When most of the Indian coke makers were finding it difficult to locate buyers in the market even at low prices because of not so encouraging sentiment in steel industry during the third quarter because of increased imports of low priced material, the higher sales and consequently higher profit by Gujarat NRE is praiseworthy,” they said.

However, a section of other sources attributed better performance of Gujarat NRE during the third quarter to its decision to sell a majority of its products under long term or quarterly contracts with steel makers.

“The increased income might have also come from increased production as the company was working on increasing its capacity and the new capacities might have come to operation recently,” the second section of sources said.

The company, however, did not provide in its filing to stock exchanges as to how much coke it had produced or sold during the third quarter of 2011-12 or in second and third quarters of 2012-13.

SAIL, RINL conclude negotiations for Q1 coking coal procurement State-owned mills Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) have concluded negotiations for the procurement of coking coal from Australia and the US for the first quarter of 2013.

BHP Billiton Mitsubishi Alliance (BMA) managed to clinch Australian coking coal contracts with the Indian mills. Anglo American and Peabody, who also sell Australian coking coal, have not yet concluded deals, industry sources said.

SAIL was said to have contracted around 1 million tons (mt) of hard coking coal from BMA for JanuaryMarch quarter, the price for half of which was determined by the “benchmark” quarterly price set in Japan in early December.

The premium for mid-vol hard coking coals Goonyella and Illawarra was set at $162 per ton fob Australia.

The other half is to be determined by BMA’s monthly pricing mechanism.

Meanwhile, RINL had finalised the procurement of Peak Downs, Saraji and Gregory coking coals from BMA using a mixture of monthly and quarterly pricing. The quarterly price for Peak Downs and Saraji was in line with the Japanese benchmark price of $165 per ton fob.

Blackwater Weak semi-soft was also settled at $128 per ton fob Australia on a quarterly basis, sources informed. The quantity of contracted material was, however, not known.

Only SAIL procured Poitrel midvol PCI from BMA at a quarterly price of $117 per ton fob. RINL does not use PCI coals. Both mills have also clinched Q1 deals with US miners Alpha Resources and Logan and Kanawha.

Coal Insights, January 2013

51

International

World energy efficiency to improve 31% by 2030 Coal Insights Bureau

B

y 2030, the world will be a much more crowded and significantly richer place. The global population will grow by around 1.3 billion, touching 8.3 billion as compared to 7 billion people that inhabit the planet now. Simultaneously, the world income in 2030 would be roughly double the 2011 level in real terms. Will there be adequate supply of primary energy for this richer, larger population? Well, the key to energy adequacy in 2030 would be increased energy efficiency, says the latest report by BP Energy Outlook.

“World primary energy consumption is projected to grow by 1.6 percent per annum from 2011 to 2030, adding 36 percent to global consumption by 2030,” the report says.

The growth rate, however, would decline from 2.5 percent for 2000-10 to 2.1 percent for 2010-20, and 1.3 percent from 2020 to 2030.

The majority of the energy consumption growth would be accounted for by the developing countries. In fact, low and medium income economies outside the OECD would account for over 90 percent of population growth to 2030. Due to their rapid industrialisation, urbanisation and motorisation, they (non-OECD countries) would also contribute 70 percent of the

8 7 6 5 4 3 2 1 0

global GDP growth and over 90 percent of the global energy demand growth during this period.

“Non-OECD energy consumption in 2030 is 61 percent above the 2011 level, with growth averaging 2.5 percent (or 1.5 percent p.a. per capita), accounting for 65 percent of world consumption (compared to 53 percent in 2011),” the report notes. In contrast, OECD energy consumption in 2030 would be just 6 percent higher than in 2011 (0.3 percent p.a.), and will decline in per capita terms (-0.2 percent p.a. during 2011-30).

Renewables lead growth chart

Over the next two decades, the fastest growing fuels would be renewables (including biofuels) with growth averaging 7.6 percent p.a. during 2011-30. Nuclear (2.6 percent p.a.) and hydro (2.0 percent p.a.) would both grow faster than total energy. Among fossil fuels, gas would grow the fastest (2.0 percent p.a.), followed by coal (1.2 percent p.a.), and oil (0.8 percent p.a.).

Among the various sectors consuming energy, energy used for power generation would grow by 49 percent (2.1 percent p.a.) during 2011-30, and would account for 57 percent of global primary energy growth.

Primary energy used directly in industry would grow by 31 percent (1.4 percent p.a.), accounting for Growth rate for various fuel sources during 25 percent of the 2011-30 (% p.a.) growth of primary energy consumption.

According to the report, the power sector would lead the growth of final energy consumption, particularly in rapidly developing economies. However, this sector would diversify its fuel mix, Renewables Nuclear Hydro Gas Coal Oil

52 Coal Insights, January 2013

with more than half the growth coming from non-fossil fuels. Renewables would contribute 27 percent of the growth, just ahead of coal (26 percent) and gas (21 percent).

The industrial sector would account for 57 percent of the projected growth of final energy demand to 2030. The transport sector would show the weakest growth, with OECD transport demand projected to decline. The (transport) sector would start to show some diversification away from oil; gas would account for 16 percent of transport energy demand growth, with another 13 percent coming from biofuels, and 2 percent from electricity.

The growth of “other” sector energy consumption (primarily residential and commercial) would be heavily weighted towards electricity, with gas making up virtually all the non-electricity energy use.

Energy efficiency the key

Despite significant growth in production of almost all the energy resources, meeting future demand would be difficult without a substantial improvement in energy efficiency.

In fact, the focus of the market should be achieving higher efficiency in energy consumption, especially in the emerging non-OECD countries, the report says.

“We have previously noted the long run trend of declining and converging energy intensity (the amount of energy consumed per unit of GDP). Current high prices for energy and global integration reinforce this trend,” it says.

Global energy intensity, the report forecasts, will be 31 percent lower in 2030 compared to 2011. The figure will decline at the rate of 1.9 percent per annum during 2011-30, compared to a decline rate of 1 percent p.a. for 2000-10. The rate of decline will accelerate post 2020, averaging 2.2 percent p.a. for 2020-30. This will largely be led by China’s anticipated shift to a less energy-intensive development path.

However, energy intensity is expected to decline across all regions.

“The impact of declining energy intensity can be seen clearly in the gap between GDP and energy consumption. Without the projected intensity decline, the world would need to almost double energy supply by 2030 to sustain economic growth, rather than the 36 percent increase required in our Outlook,” the report concludes.

International

Will coal end OPEC’s hegemony?

Arindam Bandyopadhyay

I

t might have pleased God to give a balanced distribution of natural resources among the national borders created by men. Leave out USA, and you find some countries bestowed with huge oil reserves but lacking in farm land; others given rich alluvial soil but hardly any energy fuel. That is why the theory of comparative advantage seemed so very apt for a new world economic order. But then, both the God and economics were badly failed by the world’s excessive dependence on crude oil and therefore, OPEC. So when the analysts of International Energy Agency (IEA) forecast an increase in the share of coal in the global energy matrix, for some this came as good news. By 2017, the forecasters said, coal will catch up crude oil and that consumption of both these sources of fuel would reach around 4.30-4.40 billion tons of oil equivalent (btoe). 2017 onwards, coal would overtake oil and rule the world energy scenario for at least the next two decades.

The findings were corroborated by BP Energy Outlook 2030 and the World

Coal Association (WCA). Between 2015 and 2020, the BP report said, the share of both crude and coal would converge on a downward slide while that of natural gas would continue upwards. All in all, post 2030, coal and gas would dominate the world energy sector while crude would lose its pride of place.

For the world as a whole, increased share of coal largely implies a better distribution of energy resources. Coal reserve is more widely distributed across 70 countries, while crude reserves are concentrated in 20 countries, of which 12 countries, known as OPEC, account for 80 percent of the world’s total crude oil supply. Similarly, nearly 50 percent of the world’s proven natural gas reserve is found only in five countries.

A change in the energy mix would result in lesser dependence on OPEC, which may not be unwelcome by the emerging nations such as China and India. Coincidentally, these countries have negligible crude reserves, but account for one-fourth of the world’s coal resources. This coincidence may prove to be very significant in the overall balancing of economic power in the future.

Again, these two countries are expected

Growth in global supply of coal and oil (mboe/d)

to hold sway over the future energy consumption in the world. Coal’s emergence as the dominant fuel and its rich reserves in China and India may change the price behaviour in the global crude market. The occasional spikes in crude oil due to supply disruptions from political upheavals (and gradual depletion) may not bite that hard once its share comes down considerably.

What this means is significant forex savings for crude importing countries and hence a better trade balance.

On the whole, a shift from crude to other energy resources (which are widely distributed) may favour the emerging world, much to the dismay of OPEC and the Middle East. However, how far this would fructify will depend on the degree to which coal can replace the uses of oil and how coal prices play out vis-à-vis gas and oil.

Advantage coal

The major advantage of coal is its abundance.

Coal is far more plentiful, according to WCA, and has around 112 years of proven reserves worldwide, compared to 40 years for oil and 59 years for gas.

Incidentally, the large scale use of coal as a primary fuel preceded that of other fuels including oil. Even in 1960, the share of coal in global energy supply was greater than that of oil. The use of oil grew fast during the 1970s and the following decades.

However, the growth rate has slipped since the worldwide economic recession gripped economies in 2008.

Share of primary fuel resources in global energy market (%)

110 40

100

35

90

30

80

25 20

70

15

60 50

Gas

5

2035

Other renew ables

2020

2010

Coal

Biomass

0

2009

2035

Oil

2020

2010

2009

Oil

10

Coal Insights, January 2013

53

International According to some research matrix is “good news” for the Proven oil reserves estimates, half of the world’s world’s energy poor, said Milton total reserve of crude has Catelin, Chief Executive of billion barrels already been depleted (peak WCA. “It means developing oil). The remaining half would countries will have access to an abundant, affordable and be costlier to extract and hence reliable fuel source to meet their uneconomical at “peace-time growing energy needs well into prices”. The costing is simple the future, powering homes and to work out. The more the businesses and lifting millions depth of oil, the greater is out of poverty.” the cost of extraction. Only a spike in prices can make the Advantage India, China? uneconomic fields viable. In the absence of any substantial India and China would keep new discovery in recent years busy the energy economists Proven coal reserves (except for the discovery at in the coming decades. Their million tons Gulf of Mexico)*, the oil price huge population growth – India has to remain bullish to justify alone would add 21 percent the higher costs. of the world’s incremental In comparison, coal population over the next two deposits still remain grossly decades – as well as high real abundant. “In terms of calorific GDP growth would lead to value, there are more coal galloping demand for energy reserves than the sum of oil fuels. and gas reserves. At the end of OPEC estimated that 2010, the US, Russia, China, India’s oil demand would nearly India and Australia account treble during the period 2010for three-quarters of global 35 while that of China would reserves….The abundance of double over the levels currently Proven natural gas reserves coal is reflected in the fact that prevailing. During this span, oil trillion cubic metres the R/P (reserve/production) demand from OECD countries ratio currently stands at close would actually decline by over to 120 years,” says the World 10 percent. Other regions Oil Outlook report (2012) by would see only a marginal OPEC. growth in demand.

Another factor that If this huge energy appetite goes in favour of coal is the of India and China is not met relative backwardness of many with, the truncated growth of producing and consuming these economies would leave economies in technology a domino effect on the growth absorption. Countries like prospects of an ailing, old, India and Indonesia, which anorexic (developed) world.

Source: OPEC Annual Statistical Bulletin, 2012 edition have become major producers At the same time, meeting this demand would be a major task. in the last decade, still lack in adoption and deployment of state-of- too. Unlike crude, where an established swap The spike in crude prices would put pressure the-art technologies in coal mining and its derivatives market and excessive speculation on their balance of payments (BoP), which in use. As the dry fuel becomes the dominant often decouples prices from market turn would affect their currency and growth energy source worldwide, faster technology fundamentals, coal price is largely determined performance.

At such a juncture, the prominence of upgradation would help increase its efficiency by physical parameters of demand and supply. in both production and consumption, thereby This ensures a relative stability in coal prices coal as a fuel appears to be an interesting further increasing the ‘life span’ of this vital in the international market versus the volatile economic coincidence.

China and India together possess only fuel resource. crude prices.

Coal scores over oil on the price front The increasing role of coal in the energy minuscule (around 1 percent) reserves of oil, *Footnote: There was a sudden revision in crude reserves estimates by OPEC members in recent past. However, such upwardly revision was debated strongly and blamed on the introduction of a system of country production quotas partly based on reserves levels. Later on, the increase was defended partly by the shift in ownership of reserves away from international oil companies, some of whom were obliged to report reserves under conservative US Securities and Exchange Commission rules.

54 Coal Insights, January 2013

International

If this huge energy appetite of India and China is not met with, the truncated growth of these economies would leave a domino effect on the growth prospects of an ailing, old, anorexic (developed) world. At the same time, meeting this demand would be a major task. The spike in crude prices would put pressure on their balance of payments (BoP), which in turn would affect their currency and growth performance.

At such a juncture, the prominence of coal as a fuel appears to be an interesting economic coincidence. but around 23 percent of the world’s proven coal deposits. Between these two countries, India seems to hold an edge due to its late pick-up and lower consumption.

At the present level of consumption, India’s proven coal reserves (118 bn tons) would feed the economy for 140 years. In contrast, China has only 12 years stock of crude and 35 years stock of coal, given the current levels of consumption of these resources. It will be interesting to see how the economic giant deals with its energy resource crunch from there on.

Meanwhile, both of these countries are aggressively acquiring coal blocks overseas.

The Indian companies, led by the Adani Group, Reliance, Tata, GVK and Lanco, have already built up a reserve of more than 20 bn tons, equivalent to the coal reserves of Indonesia. While India’s increasing imports remain a talking point for the domestic planners, the huge reserve in its own backyard may back up as insurance for its future energy needs.

Substituting oil in transport

WCA expects that the subjugation of oil to coal may help stop the oil importers dance to the tune of OPEC. How far this is practicable would depend much on how far coal can substitute crude’s hegemony in sector-specific uses.

Growth in oil demand since 1980 has been dominated by transportation use – mainly road transportation, but also aviation, internal waterways and international marine.

According to OPEC, over the past three decades, the average annual growth in OECD and non-OECD countries has been very similar, each at around 0.3 mboe/d. At the global level, transportation is expected to

highest in China and India. As of 2011, these two countries accounted for 30 percent of total motor vehicle production by the world’s top 20 producers (which include automotive giants like the US, Japan, Germany and South Korea).

Realising that the massive growth in road vehicles is putting a strain on the economy (by escalating the country’s oil import bill), the Indian government is trying to encourage the development of electric and hybrid vehicles. However, the extent to which these new generation vehicles can send gasoline vehicles off-road remains doubtful. In such a situation, how far coal is able to replace oil’s

continue to dominate growth over the period 2009-2035. However, this increase will come only from non-OECD countries.

Break-up by OPEC, non-OPEC “The key to future 19% demand growth is in transportation in nonOECD countries, which accounts for close to three-quarters of the increase in oil demand in the period to 2035. In contrast to both OECD 81% and Eurasian countries, OPEC Non-OPEC developing countries also see a rise in oil use in other Break-up by OPEC members sectors (petrochemicals, household/ commercial/ 13% Venezuela agriculture, other Saudi Arabia 22% 12% industrial uses). But all Iran regions will see the small Iraq amount of oil that is Kuwait still used for electricity UAE 8% Libya generation decline in Nigeria the future,” the OPEC 8% Qatar 25% report says.

4% Algeria On the whole, 1% 1%1% 2% 3% Angola the transport sector Ecuador accounted for nearly 30 percent of the worldBreak-up by region wide consumption of Middle East energy. Of this, three56% fourths come from road Africa vehicles and oil provides 95 percent of the primary Asia & Oceania energy consumed by North America the transport sector 9% worldwide.

7% 3% Central & 1% The growth of the South America 8% 16% automobile sector, in Europe recent years, has been the

Coal Insights, January 2013

55

International

The ‘dirty’ debate

E

ncouraging though it may sound, the increasing role of coal also has its share of disapproval. In its annual Medium-Term Coal Market Report (MCMR), the International Energy Agency (IEA) has suggested that the increased burning of coal will annul the efforts to resist climatic changes. The world will burn an additional 1.2 bn tons of coal per year by 2017 compared to today, it said, terming it as bad news for the environment.

The report further notes that in the absence of a high carbon price, only fierce competition from low-priced gas can effectively reduce coal demand. “The US

use in transportation would determine to what extent the emerging economies such as India and China can be free from the clutch of crude oil-slavery.

Technology is the key

In order to emerge as the dominant fuel, the coal sector must address three major challenges: a) archaic mining technology in many developing countries; b) low efficiency in use of coal, c) and coal’s adverse impact on environment.

Average annual global growth in oil demand by sector

56 Coal Insights, January 2013

experience suggests that a more efficient gas market, marked by flexible pricing and fueled by indigenous unconventional resources that are produced sustainably, can reduce coal use, CO2 emissions and consumers’ electricity bills, without harming energy security,” said IEA Executive Director Maria van der Hoeven.

“Europe, China and other regions should take note,” she said.

The report’s forecasts are based on a troubling assumption, namely, that carbon capture and sequestration (CCS) will not be available during the outlook period. “CCS technologies are not taking off as once expected, which means CO2 emissions will keep growing substantially. Without progress in CCS, and if other countries cannot replicate the US experience and reduce coal demand, coal faces the risk of a potential climate policy backlash,” she said.

Before the winds of caution could blow over, World Coal Association (WCA) came up with a quick reprisal. WCA chief executive Milton Catelin described IEA’s views as prejudiced and partisan.

In earlier reports, the IEA has already highlighted that coal has met almost half of the increase in the world’s energy demand in the past decade.

They’ve also shown that coal will provide more than half of the on-grid electricity needed to meet its ‘Energy for All’ scenario – helping to lift 1.3 billion people out of energy poverty. The huge achievement in China of lifting 600 million people out of poverty since the early 1980s has been fuelled by coal.

“Unfortunately, many still only see coal use through the lens of climate change,” said Catelin. These two global challenges, namely energy access and climate change, should be treated as integrated priorities, he suggested.

“It’s time to add a development filter to the climate lens when looking at coal’s role in the global energy mix....Governments, the international community and the IEA need to recognise that the increasing demand for coal means they must treat it as part of the climate solution, not part of the problem,” he added.

Despite advancement in production methods and equipment, coal mining in many part of India, China, Indonesia, Ukraine and Mongolia remain outmoded and hence less efficient and risky.

For instance, India till now grossly lacks technology to mine coal lying 300 mtrs below the ground. China’s coal mines, according to reports, account for 75 percent of the world’s mining fatalities while producing 40 percent of global output. The gross defiance of environmental norms at many collieries

in Indonesia and Ukraine raise concern internationally.

Moreover, many potential energy sources within the ambit of coal sector remains untapped. In India, coal-to-liquid (CTL) and underground coal gasification (UCG) are still in the experimental stage.

Interestingly, it is this CTL technology, which if adopted successfully, can curb the use of oil in transport and thus replace oil big time. According to WCA, coal liquefaction can help meet these countries’ future demand

Average annual global growth in oil demand in OECD countries

Average annual global growth in oil demand in developing countries

International

Coal to liquid (CTL)

It is the process of producing liquid fuels from coal.

Coal liquefaction is a means of addressing the many energy applications that are suited for consuming liquids.

The technology entails heating coal, often with various reagents such as hydrogen, which produces a liquid. The economic attractiveness of coal liquifaction is coupled to the price of petroleum. for oil. Coal liquefaction is not a new technology. In fact, CTL was developed and has been in use since the early part of the last century. In South Africa, coal liquefaction already meets 30 percent of oil demand.

Finally, technology can actually help conquer the final frontier – environmental degradation. As Catelin said, “We need to get serious about deploying carbon capture

Underground coal gasification (UCG)

It is an industrial process, which converts coal into product gas.

UCG is an in-situ gasification process carried out in nonmined coal seams using injection of oxidants, and bringing the product gas to surface through production wells drilled from the surface. The technique can be applied to resources that are otherwise unprofitable or technically complicated. and storage, but we can take much more effective, affordable and immediate action by supporting the deployment of high-efficiency low-emission coal-fired power plants.”

Quoting a recent IEA report, he said “Deploying modern, highly efficient coal plants can reduce CO2 emissions by as much as 30 percent from coal-fired power generation and it can do this at a much lower cost than

Coalbed methane (CBM)

CMB is also called coalbed gas or coal mine methane (CMM). It is a form of natural gas extracted from coal beds. In recent decades it has become an important source of energy in the US, Canada and other countries. Australia has rich deposits where it is known as coal seam gas (CSG). It is nearly identical with natural gas (CH4) and is transported and used as an energy source in natural gas applications. renewable energies. That means there are huge economic and climate benefits from building more efficient coal-fired power stations.”

If the developing world pays heed to the suggestions for upgrading coal technology, it is earnestly hoped that coal’s increasing role in the world’s energy matrix would not only be good news for the energy poor, but also be good news for the green brigade.

Coal Insights, January 2013

57

International

US coal production declined by 6.3% in 2012: EIA Chandrika Bose

U

S coal consumption is estimated to fall to 894.2 million short tons (MMst) in 2012 but might increase to 912.1 MMst in 2013, according to the latest report by US Energy Information Administration (EIA). Coal consumption may further rise to 927.4 MMst in 2014.

EIA estimates coal consumption in the electric power sector at 829.3 MMst in 2012, the lowest since 1992. Lower natural gas prices paid by electric generators led to a significant increase in the share of natural gas-fired generation last year. However, higher natural gas prices, coupled with slightly higher electricity demand, might lead to an increase in coal-fired generation over

2013 and 2014 to 846.9 MMst and 859.4 MMst respectively.

As estimated by EIA, coal production declined by 6.3 percent in 2012 to 1,027.1 MMst, due to a fall in domestic consumption.

Coal production is expected to decline further by 3.6 percent in 2013 to 990.5 MMst as primary and secondary inventory draws combined with a small increase in coal imports meet a small consumption increase in 2013. EIA forecasts that coal production may grow by 3 percent in 2014 to 1020.8 MMst as coal exports rise.

Coal trade

Coal exports by the US are estimated to have reached a record volume of 123.7 MMst in 2012. Continuing economic weakness in Europe and lower international coal prices are expected to contribute to lower coal exports in 2013 which might go down to 108.2 MMst. US metallurgical coal exports could be reduced if China removes an export tariff on Chinese coke, which steel producers import in lieu of metallurgical coal.

US coal exports are forecast to rise marginally to 113.8 MMst in 2014 as the world economic situation gets better.

Coal prices

Delivered coal prices to the electric power industry increased steadily over the 10-year period ended 2011, when the delivered coal price averaged $2.39 per MMBtu which was a 6-percent increase from 2010.

EIA expects that

58 Coal Insights, January 2013

changing market conditions, including weaker domestic demand for coal and higher coal inventories, will slow increases in coal prices and contribute to the shut-in of higher-cost production. EIA forecasts that the delivered coal price will average $2.40 per MMBtu in 2012, $2.44 per MMBtu in 2013, and $2.50 per MMBtu in 2014.

Electricity

EIA forecasts that residential electricity sales will see a projected annual decline of 0.3 percent during 2013 to 3.75 billion kilowatthours per day, as residential electricity sales during the winter months of 2013 might be higher than last year while summer electricity sales are likely to be lower.

Retail sales to the residential sector will grow by 0.1 percent to 3.75 billion kilowatthours per day during 2014 as weather during 2014 is assumed to be similar to that in 2013. According to EIA forecasts, growth in the number of customers in future might be tempered by increased efficiency in residential electricity consumption.

Most regions of the US experienced temperatures that were much warmer than normal during 2012, in both the winter and the summer taking total electricity consumption in the country to 10.44 billion kilowatthours per day. Electricity consumption might remain at almost similar levels in 2013 but rise slightly to 10.52 billion kilowatthours per day in the current year.

Growth in industrial electricity consumption is likely to pick up in the second half of 2013 when industrial electricity sales show year-over-year growth of 0.7 percent to 2.7 billion kilowatthours per day. During 2014, industrial electricity sales may grow by 1.8 percent to 2.75 billion kilowatthours per day.

EIA expects total generation of electricity to remain largely unchanged in 2013 and to grow by 0.8 percent or 94 gigawatthours per day (GWh/d) in 2014. Coal is expected to for 39.6 percent of total generation in 2014.

The agency in its latest report expects rising costs of infrastructure upgrades to drive increases in residential electricity rates, although lower fuel prices in recent years have kept growth in retail rates relatively modest. After an increase of 1.3 percent during 2012, EIA expects retail residential electricity prices to grow by 1.9 percent in 2013 and by 2.6 percent in 2014. 

logistics

Traffic handling by major ports down 3% in AprilDecember Coal Insights Bureau

T

he 12 major Indian ports have handled 405.27 million tons (mt) of traffic during the first nine months (April-December) of 2012-13, about 3.09 percent lower than 418.20 mt recorded during the same period last year.

According to data released by the Indian Ports Association (IPA), the country’s major ports handled a total of 20.91 mt of coking coal in April-December period, down 3.68 percent as compared with 21.71 mt handled in the same period last year.

However, the movement of thermal coal through the major ports was up 15.44

percent to 42.23 mt during April-December, compared to 36.58 mt achieved in the same period last year.

Movement of iron ore through the major ports showed a significant drop of 54.56 percent in April-December due to restrictions imposed on mining Traffic handled at major ports and a hike in export (During Apr-Dec, 2012* vis-a-vis Apr-Dec, 2011) duty on iron ore. The (*) Tentative (in '000 tons) major ports together April to December traffic % variation against handled 21.72 mt of Ports prev. year traffic 2012* 2011 iron ore in the AprilDecember period Kolkata compared to 47.81 Kolkata dock system 8666 9392 -7.73 mt handled in the Haldia dock complex 20198 24427 -17.31 same period last year.

Vishakhapatnam Total: Kolkata 28864 33819 -14.65 port handled the Paradip 40749 40500 0.61 highest volume of Visakhapatnam 44201 52646 -16.04 8.79 mt of iron ore Ennore 12212 10392 17.51 in April-December.

This volume, Chennai 39896 41940 -4.87 however, was about V.O. Chidambaranar 20951 20853 0.47 16.04 percent Cochin 14893 14872 0.14 lower than the iron New Mangalore 27025 24233 11.52 ore traffic moved through the port in Mormugao 14918 28337 -47.36 the same period last Mumbai 44090 40217 9.63 year.

JNPT 47977 49489 -3.06 Movement of Kandla 69497 60910 14.10 container traffic in terms of tonnage Total 405273 418208 -3.09 fell in the AprilSource: IPA

December period, while that of TEUs also dropped during the period. The major ports handled 89.23 mt of tonnage and 5.76 million TEUs in April-December period compared to 89.89 mt of tonnage and 5.84 million TEUs in the same period last year.

Among the major ports, Paradip port had the distinction of handling the highest volume of thermal coal of around 15.16 mt in April-December period. Visakhapatnam port handled the highest quantity of 5.15 mt of coking coal during the period.

Movement of coking coal through Paradip, Kolkata, Visakhapatnam and Chennai ports declined during the period when compared to the corresponding period last year.

Five major ports showed negative growth in traffic handling during the AprilDecember period of the current fiscal, while the remaining seven showed positive growth on a year-on-year basis.

In terms of growth, Ennore port topped the list with a 17.51 percent increase in cargo throughput. Cochin port’s growth was lowest at about 0.14 percent during the period. In terms of traffic volume, Kandla port clinched the top rank with a cargo volume of 69.49 mt recorded for the period.

The Mormugao port registered the highest decline of 47.36 percent in traffic handling during the period due to a fall in iron ore export. 

Coal Insights, January 2013

59

logistics

Railways coal handling up 8.8% in December Coal Insights Bureau

T

he Indian Railways transported 44.5 million tons (mt) of coal in December 2012, up 8.83 percent from 40.89 mt in November, according to information available with Coal Insights.

Railways’ revenue earnings from

transportation of coal also increased to `3,347.27 crore in December from `3,085.81 crore in November.

Overall, the Indian Railways’ revenue earnings from commodity-wise freight traffic rose month-on-month in December, mainly due to higher transportation of coal and iron ore. Revenue earnings from

Commodity-wise revenue Commodity

Quantity (in mt) Dec’11

Earning (in ` cr) Dec’12

Dec’11

Dec’12

Coal (i) for steel plants (ii) for washeries

3.98

3.73

169.15

214.51

0.12

0.11

1.12

2.21

27.15

28.32

1,766.91

2,317.78

9.76

12.34

611.38

812.77

41.01

44.5

2,548.56

3,347.27

1.12

1.24

99.41

130.07

(i) from steel plants

2.39

2.35

306.4

370.98

(ii) from other points

0.71

0.66

62.92

69.42

3.1

3.01

369.32

440.4

(i) for export

0.38

0.11

107.13

28.24

(ii) for steel plants

5.18

5.19

206.31

233.75

(iii) for other domestic users

3.38

4.16

230.2

319.76

(iv) Total

8.94

9.46

543.64

581.75

Cement

9.37

8.72

562.73

674.78

Foodgrains

3.94

4.24

403.7

596.54

Fertilizers

5.61

4.38

481.76

480.23

Mineral Oil (POL)

3.52

3.45

326.89

403.16

(i) Domestic containers

0.79

0.79

78.68

85.79

(ii) EXIM containers

2.67

2.64

224.96

249.88

(iii) Total

3.46

3.43

303.64

335.67

Balance other goods

6.74

5.79

462.79

501.87

86.81

88.22

6102.44

7491.74

(iii) for thermal power houses (iv) for public use (v) Total Raw material for steel plants except iron ore Pig iron and finished steel

(iii) Total Iron ore

Container Service

Total revenue earning traffic

60 Coal Insights, January 2013

commodity-wise freight traffic during December 2012 stood at `7491.74 crore, up 8.82 percent compared with `6,884.56 crore earned in November.

Revenue from transportation of iron ore for exports, steel plants and for other domestic user in December rose to `581.75 crore, up 18.72 percent from `490 crore in November. The quantity of iron ore transported rose to 9.46 mt as compared to 8.37 mt in the previous month.

Revenue from transportation of cement in December stood at `674.78 (8.72 mt) as compared to `629.5 crore (7.96 mt) in November, while that from foodgrains transportation increased to `596.54 (4.24 mt) in December from `523.61 crore (3.82 mt) in November.

The Railways revenue from transportation of fertilizers in December rose to `480.23 crore (4.38 mt) from `476.18 crore (4.38 mt) in November.

Revenue from transportation of petroleum oil and lubricant (POL) in December stood at `403.16 (3.45 mt), while the same from pig iron and finished steel from steel plants and other points was `440.4 crore (3.01 mt). Revenue from container services was `335.67 crore (3.43 mt) and from transportation of other goods was `501.87 crore (5.79mt).

logistics

Dedicated freight corridor project to be ready by 2017 Sanjukta Ganguly

R

iding on the waves of India’s economic growth, Indian Railways has witnessed higher freight volumes in recent years. For the Railways, the growth in freight came even without substantial investment in infrastructure, increased axle load, reduction of turn-round time of rolling stock, reduced unit cost of transportation, rationalisation of tariffs (resulting in improvement in market share) and improved operational margins.

Over the last two to three years, the rail freight traffic has grown by 8 to 11 percent and was projected to cross 1,100 million tons (mt) by the end of Eleventh Five Year Plan (March 2012).

To manage this huge freight traffic growth, there was a necessity for the Railways to link the four metropolitan cities of Delhi, Mumbai, Chennai and Howrah, commonly known as the Golden Quadrilateral; and its two diagonals (Delhi-Chennai and MumbaiHowrah), adding up to a total route length of 10,122 km. This route is estimated to carry more than 55 percent of revenue earning freight traffic of the Indian Railways.

However, the existing trunk routes of Howrah-Delhi on the Eastern Corridor and Mumbai-Delhi on the Western Corridor are already highly saturated, with the line capacity utilisation varying between 115 and 150. The surging power sector growth which need heavy coal movement, booming infrastructure construction and growing international trade have thus led to the conception of the Dedicated Freight Corridors (DFC) along the Eastern and Western Routes.

According to government sources, this entire dream project of constructing the dedicated freight corridor is envisioned to be ready and operational by 2017.

Tata, Essar in race with Chinese for Eastern DFC

After years of planning, the 3,300-km

Dedicated freight corridor

DFC is finally on the horizon and global construction majors are vying for around `12,000-crore civil works for two packages on the Eastern Corridor. Among those who are in fray are Indian groups like Tatas, Essar and IVCRL, and also the Chinese, Russian and Spanish companies.

China Railway First Group, part of the state-owned China Railway Engineering Corporation, in consortium with Soma, Tata-Aldesa, IVRCL-KMB, Essar-PatelBSCPL are among the 10 players who have put in bids for building the Khurja-Bhaupur (343 km) and Rewari-Palanpur (640 km) stretch.

Earlier, 13 companies were declared technically-qualified for the Khurja-Kanpur section, but only 10 companies finally submitted their financial bids for this project. Lanco Infratech and Hindustan Construction decided to skip the race.

Meanwhile, two Japanese consortiums, Sojitz Corporation-L&T and MitsuiIRCON Leighton are expected to submit financial bids for the Rewari-Palanpur section, a source said.

According to reports, land acquisition for the two stretches on the Eastern Corridor is almost complete. The 343-km Khurja-

Bhaupur project was sliced into three subsets, and the bidders had been qualified to bid for one, two or all three. In the bids, the consortia have offered various levels of discounts depending on the size of projects they get.

The contractor for the World Bankfunded Eastern Corridor is likely to be announced by the month-end, the source added. The bids are being evaluated by the company and the World Bank.

According to Dedicated Freight Corridor Corporation of India Limited (DFCCIL) sources, the Eastern Corridor will traverse six states and is projected to cater to a number of traffic streams – coal for the power plants in the northern region of Uttar Pradesh (UP), Delhi, Harayana, Punjab and parts of Rajasthan from Eastern Coalfields; finished steel, food grains, cement, fertilizers, lime stone from Rajasthan to steel plants in the east and general goods. The total traffic in UP direction is projected to go up to 116 mt by 2021-22. Similarly, in the down direction, the traffic level has been projected to increase to 28 mt by 2021-22. As a result, the incremental traffic since 2005-06 works out to be a whopping 92 mt. A significant part of this increase would get diverted to the DFC. Traffic projections on Eastern DFC

(in million tons/year)

Direction/Commodity

2016-17

2021-22

54.46

61.96

Public Coal

0.61

0.95

Steel

8.24

9.74

Others

1.61

2.96

UP Direction Power House coal

Logistic Park

1.20

2.40

66.12

78.01

Fertilizer

0.23

0.42

Cement

0.78

1.52

Limestone for the Steel Plants

4.99

5.00

Salt

0..68

1.03

Others

1.61

2.96

Logistic Park

1.20

2.40

Sub-Total

9.48

13.32

75.60

91.33

Sub-Total Down Direction

Grand Total

Source: Rites Report (Eastern Corridor PETS Report)

Coal Insights, January 2013

61

logistics The Eastern DFC will be executed in a phased manner. The World Bank funding is being planned in three tranches APL1 for Khurja-Kanpur, APL2 for KanpurMughalsarai and APL3 for KhurjaLudhiana. The Loan Agreement for APL1 between World Bank and DFCCIL has been executed for $975 million for the first phase of Eastern Corridor (Khurja-Bhaupur).

With the DFCC’s compliance to various triggers, World Bank is also expected to sanction $1.05 billion loan for KanpurLudhiana section. World Bank has agreed in principle to part finance the Eastern Corridor project from Mughalsarai to Ludhiana, which has been divided into three phases.

The total in principle loan commitment is $2.725 billion.

Japanese loan for Western DFC

As an active step towards materialising the project of Western DFC, Indian Railways has signed a loan agreement worth about `20,000 crore with Japan. The project appraisal for the two routes comprising Vadodara to Jawaharlal Nehru port (JNPT) and Rewari to Dadri in the Western DFC was recently signed between Japan International Co-operation Agency (JICA) and Indian Railways.

The Western DFC of 1,499 km will be from JNPT in Mumbai to Tughlakbad and Traffic projections on Western DFC

(in million tons/year)

Direction/Commodity

2016-17

2021-22

Food grains, Fertiliser

1.20

1.80

POL

0.30

0.50

Cement, Salt, Miscellaneous

0.40

0.80

Containers (in million TEUs)

1.90

2.70

Sub-Total excluding containers

1.90

3.10

Coal, Cement, Iron & Steel

6.30

9.40

Fertilizer, Foodgrains, Salt

1.60

2.60

UP Direction

DN Direction

POL

1.00

1.50

Containers (in million TEUs)

1.90

2.60

Sub-Total excluding containers

8.90

13.50

Total excluding Containers

10.90

16.60

Total Containers (in million TEUs)

3.80

5.30

Rites Report: Western Corridor PETS Report

62 Coal Insights, January 2013

Western Corridor

Year

Phase I

Rewari–Vadodara (920 kms)

2009-2016

Phase II

Vadodara–JNPT(430 kms)

2010-2017

Phase III

Rewari–Dadri(140 kms)

2010-2017

Phase I-APL1

Khurja–Kanpur (343 kms)

2009-2016

Phase II-APL2

Kanpur–Mughalsarai (390 kms)

2010-2016

Phase III-APL3

Khurja–Ludhiana (397 kms)

2011-2016

Phase IV (Funding through PPP)

Dankuni–Sonnagar (550 kms)

2011-2016

Phase Ia ( Funding by Ministry of Railways)

Sonnagar–Mugal Sarai (125 kms)

2010-2016

Eastern Corridor

Source: DFCCIL

Dadri near Delhi and cater to the container transport requirement between the existing and emerging ports in western India and northern hinterland.

As per media reports, the proposed funding is under Special Terms of Economic Participation (STEP) between Japan and India. The value of the proposed loan is JPY 295 billion (about `20,000 crore), which is a soft loan with the repayment period of 40 years. With this loan, funding of the entire Western DFC from Delhi to Mumbai is

CIL wants dedicated coal corridor Harping on the transportation hurdles for carrying coal, Coal India Ltd (CIL) has called for a dedicated freight corridor (DFC) only for transport of coal from mines and ports to end user plants.

“The dedicated freight corridor as planned is not going to solve the problem of coal evacuation. This is so because the planned corridor will primarily connect the non-coal areas,” a top official of the company said.

“We think a similar project should be done for coal only,” he said.

“Last line connectivity is a major hurdle for us in augmenting production. Around 300 million tons (mt) of potential exists today with CIL. Give us rail connectivity and we will start producing 150 mt of additional coal without delay,” the official said.

being taken care of and now the focus will be for speedy execution of the project, said an industry source.

As far as land acquisition for the Western DFC is concerned, out of total 3,608 hectares required in Phase-I, 3,186 hectares have been acquired. For the Phase II, of the total 2,252 hectares required, 1,041 hectares have been acquired. The remaining land is expected to be acquired during the current financial year, he added.

According to a report by DFCCIL, both the corridors will be constructed simultaneously. It is envisaged that the corridors will be fully operational over their entire length by 2017. The following table indicates the tentative phasing of the projects: 80% of land acquisition complete: Govt

More than 80 percent of land required for the implementation of Dedicated Freight Corridor (DFC) project has already been completed, an official statement recently said.

Minister of Railways, Pawan Kumar Bansal reviewed the implementation of DFC projects on January 21 and discussed various issues having critical impact on the project implementation, it said.

One of the notable features reflected during the review was the acquisition of 7,968 hectares of land which constitute over 82 percent of the project’s total requirement as stipulated by the funding agencies, e.g. World Bank, Japan International Cooperation Agency (JICA). It was appreciated that approximately 8,000 hectares of land over 9 states and 61 districts have been acquired in a span of less than three years. The remaining 18 percent land acquisition is also progressing steadily.

logistics

CIL draws up alternative plan

Coal movement may be affected due to Maha Kumbh Mela Coal Insights Bureau

T

he normal movement of coal through Railways may be affected to a great extent in February due to restricted movement of goods trains especially in the Mugalsarai-Kanpur division following increase in number of passenger trains to clear the rush of pilgrims participating in Maha Kumbh Mela, a senior official of Coal India Ltd (CIL) said.

“The Railways run a large number of passenger trains during the 55-day Maha Kumbh Mela that began on January 14 and this may affect movement of goods or wagon trains and in turn the coal movement,” the official said.

“Though the Mela will go on for almost two months, the wagon movement is likely to be affected only for 7-10 days,” he added.

The CIL official, however, felt that mass movement of pilgrims via passenger trains may not affect the goods train movement in January, but its impact will be felt in February when the number of participants is likely to rise sharply.

“We have chalked out a Rail Movement Plan in co-ordination with the Railways and the power sector to ensure that there is only minimum possible effect on coal movement, but still some delays in running of good trains cannot be avoided,” the official said.

Kumbh Mela is a mass Hindu pilgrimage in which Hindus gather at the Sangam, meeting place, of the rivers Ganges, Yamuna and mythical Saraswati, at Prayag (Allahabad) where bathing for purification from sin is considered especially auspicious.

The festival is billed as the “biggest gathering on Earth”. According to estimates, around 70 million people participated in the 45-day Ardh Kumbh Mela in Allahabad, in 2007.

The current Maha Kumbh Mela that will

last for two months began on January 14, 2013 at Allahabad (Prayag). According to government estimates more than 100 million people will attend the 2013 Kumbh mela.

ICMA alleges underloading by 2-8% Despite repeated requisitions, underloading of coal at loading points continues to be a concern for the country’s coal consumers, according to the Indian Coal Merchants Association (ICMA).

“Customers have a problem in getting the right volume of coal loaded by the coal companies. Shortages in coal loading ranges from 2% to 8%,” ICMA sources told Coal Insights.

“The loading of rakes is done by the coal companies and the customers have no control over the volume loaded.

However, they have to pay the dead freight to the railways for the shortage,” they said.

Loading of the right volume is important as in case of overloading too, the customers have to pay penal freight which is 2-3 times the normal freight.

“This continues to be a problem. The issue has been raised time and again with the coal companies but to no avail,” they added.

CIL loads record number of rakes

Meanwhile, CIL on January 12 has set a new record in coal loading through railway rakes from its various mines on significantly higher availability of rakes, a senior official told Coal Insights.

“We loaded a record number of 228 rakes on January 12, which is an all-time record.

Even on January 14, we loaded 215 rakes,” the official said.

“The average loading of rakes during the first 14 days of January stood at 208 rakes, which I would say is a much improved performance,” he added.

CIL’s average loading of coal via rail during the third quarter of 2012-13 stood at 189 rakes per day, up 10.40 percent compared with average loading of 171.2 rakes per day during the corresponding quarter of 2011-12.

The average loading per day stood at 177.3 rakes per day during the first nine months of 2012-13 (April-December), up 10.81 percent over 160 rakes per day loaded during the corresponding period of 2011-12.

Due to the better availability of rakes, CIL’s off-take this year has so far been close to the targeted volume. According to company officials, total off-take of coal till the middle of January has been almost on track.

“Our actual off-take of almost 354.50 mt as on January 14 is almost 100 percent of the target of 355.00 mt to date,” they added.

Coal Insights, January 2013

63

annexure

Brief about objectives and scope of work

S

oon after nationalization of Coal sector, Government of India formed Coal India Limited (CIL) as a holding company in November, 1975 with five subsidiary companies based on Geographical location of coalfields including one company exclusively for mine planning and designing.

Subsequently, from the administrative point of view the subsidiaries were reorganized by splitting some of the areas in their geographical boundaries and seven producing subsidiaries were formed from the initial four producing subsidiary companies in addition to the already existing planning and designing institute. Details of the organization and its activities may be seen at the website of Coal India Ltd. Since establishment of CIL in 1975, there have been significant changes in the energy policy of the country particularly after the onset of the economic liberalization in the early 1990s. The coal sector has been partially opened for private investment limited to captive consumption and coal development policy has evolved over a period

64 Coal Insights, January 2013

of time leading to doing away with the administrative price mechanism/decontrol of coal price and distribution, empowerment of performing public sector coal companies, etc. The Planning Commission and a number of high level committees including Expert committee on road Map for coal sector reforms also known as T.L. Shankar Committee recommended restructuring of CIL keeping in view the rapidly increasing demand for coal and the need for enhancing coal production and to make the coal industry competitive in the rapidly changing economic scenario.

In the light of the above it has been proposed to take up a study for restructuring of Coal India Limited to address the following issues with a view to strengthen coal development in the country.

1. To examine the recommendations of various Committees and the Planning Commission regarding the need for restructuring of CIL; 2. To access the effectiveness of the current management structure in meeting the

3.

4.

5.

6.

7.

objectives of the Company enunciated in the Articles of Association; To access the need for restructuring of CIL in light of the avoidance of drawbacks inherent in a monopolistic situation and requirements of the Company Law and SEBI regulations and tax laws; To access the scope for improving competition amongst coal mining companies which should improve production and marketing with the special emphasis on customer satisfaction; To access the need for evolving administrative structures which would promote capability enhancement in individual companies to undertake planning and implementation of innovative technologies; To access the current financial strengths and scope for better investment plans for enhanced production with suitable administrative control; and To prepare a Road Map for smooth transition towards proposed Restructuring.

E-AUCTION Monthly data of offered quantity through coaljunction and mstc (road & rail) MONTH

OFFERED BY ROAD 2,991,320 2,824,250 2,922,850 2,466,770 2,564,788 1,724,469 2,236,945 2,091,330 2,262,732 512,850 3,083,582 2,706,157 4,518,196 3,698,200 5,874,230 5,014,680 4,927,850 3,818,650 3,444,100 3,541,130 3,226,580 3,313,820 5,329,723

Jan'11 Feb'11 Mar'11 Apr'11 May'11 June'11 July'11 Aug'11 Sept'11 Oct'11 Nov'11 Dec'11 Jan'12 Feb'12 Mar'12 Apr'12 May'12 June'12 July'12 Aug'12 Sept'12 Oct'12 Nov'12

Qty. In Tons

OFFERED BY RAIL 328,366 738,520 326,950 367,390 273,884 135,535 275,070 92,040 315,350 79,060 225,852 220,400 252,812 431,150 1,675,226 867,492 327,030 239,548 195,467 164,433 225,268 236,830 241,440

Monthwise quantity offered & sold through coaljunction & mstc E-Auction MONTH Jan'11 Feb'11 Mar'11 Apr'11 May'11 June'11 July'11 Aug'11 Sept'11 Oct'11 Nov'11 Dec'11 Jan'12 Feb'12 Mar'12 Apr'12 May'12 June'12 July'12 Aug'12 Sep'12 Oct'12 Nov'12

Monthly Data of Offered Quantity through coaljunction & mstc (Road & Rail)

Qty. In Tons

Variation (In Percent) -21.42% -21.26% -23.63% -23.11% -17.96% -29.94% -10.22% -19.17% -14.53% -34.80% -12.64% -10.06% -21.22% -13.38% -13.00% -11.87% -15.20% -11.15% -18.14% -21.08% -10.44% -10.50% -12.56%

7,000,000 Quantity in Tons

5,000,000 4,000,000 3,000,000 2,000,000

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000

Companywise Quantity Offered & Sold through coaljunction & mstc in November’12 Vs October’12 Qty. In Tons Via Rail & Road

Nov'12

Oct'12

Sep'12

1,000,000

750,000

500,000

250,000

Nov'12 QTY SOLD

Oct'12 QTY OFFERED

Oct'12 QTY SOLD

CCL RAIL

CCL ROAD

SCCL RAIL

WCL RAIL

Companies Nov'12 QTY OFFERED

SCCL ROAD

WCL ROAD

ECL RAIL

ECL ROAD

SECL RAIL

SECL ROAD

NEC RAIL

NCL RAIL

NEC ROAD

NCL ROAD

0

Note: Data for the period January 2011 - December 2011 and February 2012 is for e-auction through coaljuntion only, while data for January 2012, and March 2012 - November 2012 includes data of MSTC.

66 Coal Insights, January 2013

Aug'12

July'12

June'12

May'12

Apr'12

Mar'12

Feb'12

1,250,000

MCL RAIL

Variation (In Percent) OFFERED SOLD QTY QTY 17.54% 16.02% -50.67% -100.00% 35.74% 20.62% NA NA 0.00% 0.00% NA NA NA NA NA NA 56.61% 61.34% NA NA -13.78% -14.14% 27.66% 27.66% 37.93% 38.74% NA NA 135.09% 117.76% NA NA 356.99% 339.71% NA NA 56.91% 53.30%

BCCL RAIL

Oct'12 QTY QTY SOLD OFFERED 358,100 245,050 15,812 7,906 1,175,000 1,022,610 151,000 151,000 12,000 12,000 730,050 683,550 124,370 123,555 183,018 183,018 375,000 328,215 171,000 170,554 217,300 212,200 38,000 38,000 3,550,650 3,177,658

SOLD QTY (in tons)

Companywise Quantity Offered & Sold through coaljunction & mstc in November’12 Vs October’12

Quantity In Tons

Nov'12 QTY QTY SOLD OFFERED 420,900 284,300 7,800 0 1,595,000 1,233,500 151,000 151,000 1,143,300 1,102,850 107,233 106,080 233,640 233,640 517,240 455,375 402,000 371,395 993,050 933,060 5,571,163 4,871,200

Dec'11

Nov'11

Nov'12

Oct'12

Sept'12

July'12

Aug'12

OFFERED QTY (in tons)

OFFERED BY RAIL

MCL ROAD

OFFERED BY ROAD

June'12

May'12

Apr'12

Mar'12

Feb'12

Jan'12

Nov'11

Dec'11

0

0

Jan'12

1,000,000

1,000,000

BCCL ROAD

Qty Offered In Tons

SOLD QTY (in tons) 2,608,551 2,805,310 2,481,981 2,179,060 2,328,720 1,303,176 2,255,313 1,764,911 2,203,438 385,904 2,891,019 2,632,049 3,758,496 3,576,946 6,584,608 5,183,850 4,456,357 3,605,700 2,979,323 2,924,489 3,091,583 3,177,658 4,871,200

Quantity offered & sold through coaljunction & mstc

8,000,000

6,000,000

BCCL ROAD BCCL RAIL MCL ROAD MCL RAIL NCL ROAD NCL RAIL NEC ROAD NEC RAIL SECL ROAD SECL RAIL ECL ROAD ECL RAIL WCL ROAD WCL RAIL SCCL ROAD SCCL RAIL CCL ROAD CCL RAIL TOTAL

OFFERED QTY (in tons) 3,319,686 3,562,770 3,249,800 2,834,160 2,838,672 1,860,004 2,512,015 2,183,370 2,578,082 591,910 3,309,434 2,926,557 4,771,008 4,129,350 7,568,706 5,882,172 5,254,880 4,058,198 3,639,567 3,705,563 3,451,848 3,550,650 5,571,163

port data Major ports through which Coking Coal arrived in India September ’12 - November ’12 Port

Qty (in Tons)

VIZAG MORMUGAO GANGAVARAM KOLKATA PARADIP MUNDRA

1,573,150 1,294,858 1,018,110 972,570 627,194 472,163

Port

Qty (in Tons)

NEW MANGALORE

181,360

KANDLA

86,620

ENNORE

21,441

CHENNAI

140

Grand Total

6,247,606

Major ports through which Coking Coal arrived in India – September ’12 - November ’12 7.6%

2.9%

1.4%

0.3% 0.0%

Major Coking Coal supplier countries to India (through mentioned ports) September ’12 - November ’12 Country of Origin

4,678,217

UNITED STATES

762,383

SOUTH AFRICA

238,668

NEW ZEALAND

188,393

OTHERS

379,944

Grand Total

6,247,606

Major Coking Coal supplier countries to India (through mentioned ports) – September ’12 November ’12 4%

25.2%

10.0%

Qty (in Tons)

AUSTRALIA

3%

6%

12%

15.6% 20.7% 16.3% VIZAG

MORMUGAO

GANGAVARAM

KOLKATA

PARADIP

MUNDRA

NEW MANGALORE

KANDLA

ENNORE

CHENNAI

75%

Major ports through which Steam Coal arrived in India September ’12 - November ’12 Port PARADIP MUNDRA NEW MANGALORE VIZAG GANGAVARAM KANDLA

Qty (in Tons) 2,958,136 2,887,678 1,714,757 1,242,823 1,134,911 1,023,512

Port

Qty (in Tons)

MUMBAI

890,543

ENNORE

766,160

MORMUGAO

329,847

KOLKATA

329,026

Grand Total

13,277,392

Major ports through which Steam Coal arrived in India September ’12 - November ’12 6.7%

5.8%

2.5%

2.5%

AUSTRALIA

UNITED STATES

NEW ZEALAND

OTHERS

SOUTH AFRICA

Major Steam Coal supplier countries to India (through mentioned ports) September ’12 - November ’12 Country of Origin INDONESIA SOUTH AFRICA UNITED STATES AUSTRALIA OTHERS Grand Total

Qty (in Tons) 10,649,292 1,929,842 379,221 243,231 75,806 13,277,392

Major Steam Coal supplier countries to India (through mentioned ports) September ’12 November ’12

22.3%

7.7%

2.9%

1.8%

0.6%

14.5%

8.5%

21.7%

9.4% 12.9% PARADIP

MUNDRA

NEW MANGALORE

VIZAG

GANGAVARAM

KANDLA

MUMBAI

ENNORE

MORMUGAO

KOLKATA

80.2% INDONESIA

SOUTH AFRICA

UNITED STATES

AUSTRALIA

Note: Figures are based on consignment lifted from these ports for which price details/break-up is available with Coal Insights team

68 Coal Insights, January 2013

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