Coal insights, Nov 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, Mining & Metals Professional and former Director of P&H Joy Mining Equipment India Ltd Ashok Jain, Managing Director, Saumya Mining Ltd Deepak Bhattacharyya, Chief - Horizon 1 businesses, 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, Former 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, When much is said, little work is done. That could generally be the case everywhere, but when it comes to Indian governance and administration, words are often equated with actions. Just how many times has the coal ministry given assurances on resolving the statutory clearance issues? Well, it has done it again.

At the Foundation Day celebration of Coal India Limited (CIL), a ministry spokesperson declared that very soon, clearance hurdles will be a thing of past. How soon is very soon, may one ask?

Meanwhile, another set of captive blocks has been identified for de-allocation. It is a mystery how, after so many rounds of deallocation, could there be any block left for punishment! On a serious note, this time, the blocks identified include the two allotted for coalto-liquid (CTL) projects, which implies that the effort to find an alternative fuel for transportation – and thus reduce the crude import bill – is nipped in the bud.

On the production front, CIL has continued to underperform while imports have kept on piling up. For once, the CIL chairman has expressed his frustrations over the inadequacies of governmental efforts to remove production hurdles. The indefinite delay in establishing rail connectivity to North Karanpura, Ib Valley, Mand Raigarh etc has become a cause of irritation. And the government has continued finding fault with CIL. The Planning Commission has raised its voice in favour of privatising the coal sector, yet again. That may bring some consolation to the captive block owners.

Another issue that is hogging the limelight is coal banking – actually, the Indian planners are never short on ideas – about which the industry has but a simple concern. When the captive block holders can’t meet the requirements from their own blocks, forget about producing surplus. So what is the rationale behind taxing your brain to come up with such brilliant concepts? You don’t want to run a bank that has no surplus funds, do you?

That doesn’t mean new ideas should not be tried, of course. If not anything else, they reflect the eagerness of the government, especially the coal ministry, to deliver. Only if some of those ideas could actually be put to work…!

For how long has the ministry been talking about instituting a coal regulator? Or, for how many years has CIL been pondering on importing coal to meet requirements of its power sector consumers? Or, for that matter, for how many decades has the government been trying out the concept of coal bed methane or underground coal gasification?

As a nation, India never seems to be in a hurry, except in the case of winning cricket matches. Nothing against the sport, but you must agree the economy deserves the same level of urgency, if not more.

But what if the government cannot take decisions and implement them, despite having the best intentions, due to its internal conflicts… what could the coal ministry possibly do if other departments didn’t cooperate? Well, it could keep its mouth shut. During a slowdown, the less said the better.

Happy reading,

(Rakesh Dubey) Coal Insights, November 2013

3

Contents

6 | Cover Story

26 Steam coal prices volatile in November 28 Metallurgical coal continue to weaken in November

Can coal play the oil?

36 India’s H1 coal import up 15.95%

As India gets a ‘crude’ awakening, coal offers a substitute. But nobody seems interested!

38 How viable is coal banking?

42 Cement-makers seek probe into grade slippage in CIL supplies 44 India’s cement production improves in September 46 Govt makes RPO norms stricter as discoms give CERC the slip 48 Indian power sector’s capacity addition at 530 MW in October

22 | Technology CTL: Fuelling in the gaps

A new method for coal-to-liquid is in the offing; shows improvement over conventional process.

30 | FEATURE

50 Indian paper industry to see steady growth despite challenges

CIL dares to look beyond P&L, monthly targets

62 Demand gush eases for slurry pumps 63 CIL net drops marginally in Q2

The miner decides to go beyond shortterm target practising, focus on long-term priorities.

64 Mixed performance from coal and allied sectors in H1 66 Third-party sampling for non-power cos will take time: Birla Corp 69 Natural gas plays catch-up with US thermal coal 70 US coal consumption may rise to 929.8 MMst in 2013 71 Indian coals are “difficult” 76 Traffic handling by major ports up 1.6% in Apr-Oct 77 Railways’ coal handling falls 4.9% m-o-m in Oct 78 E-auction data 80 Port data

4 Coal Insights, November 2013

51 | SPECIAL FEATURE Dig the coal, douse the fire

BCCL has the potential to become a gamechanger in the Indian coking coal market.

67 | INTERNATIONAL

Indonesia’s mining royalty hike: Poison or potion?

The country’s increased coal mining fees could bring a windfall for producers in China.

Cover Story

C

irca 1977: Shortly after the oil embargo imposed by the Arab countries shook up the US economy, the US Congress drafted a National Energy Plan. The Senate Budget Committee asked for inputs from research agencies that were working overtime to rid the US of its gross dependence on crude imports from the Middle East. A year later, the Congressional Budget Office submitted the findings.

The key suggestion that emerged was: “Replace oil and gas by abundant coal reserves.”

Cut to India, 2013. The country struggles to cope with a staggering current account deficit (CAD), leading to a record fall in its currency, primarily caused by its massive oil import bill. Sensing the urgency, the Union petroleum minister launches a “save oil” campaign; proposes a “bus day”; asks municipal bodies to encourage bicycling and stresses on the use of alternative fuels.

But, the whole country makes light of his efforts! Worse, when it comes to seeking ways to “replace oil by coal”, the researchers make light of the idea. And the country’s first-ever attempt to produce liquid fuel from coal gets nipped in the bud!

India’s ‘crude’ awakening

Can coal play the oil?

Arindam Bandyopadhyay

6 Coal Insights, November 2013

Cover Story Curse of the energy God?

Crude oil is perhaps one of the most unevenly distributed natural resources in the world. It is also one that invalidates the trade theory of comparative advantage, by creating a monopoly in the world energy market.

Emerging economies, including India, were destined to bear the brunt of this market concentration.

Among the 200 odd countries that import oil, India is the fourth largest. It has minuscule reserves of crude oil and imports 81 percent of its consumption, which is around four million barrels per day (bpd).

In the last 10 years, India has shelled out nearly $700 billion only on crude imports. In fact, oil imports have eaten up 40 percent of India’s export earnings in the last five years.

It was also the single most important factor responsible for the steep growth in the CAD. Oil accounts for about a third of India’s total imports, costing around $170 billion in 2012-13.

But it is not just about forex outgo. Crude imports have considerably pulled down India’s high GDP growth. It is estimated that a sustained $10 increase in oil prices leads to a 1.5 percent reduction in the GDP of developing countries.

For instance, India’s GDP grew at 6.9 percent during 2011-12, following a spike in international crude prices. This was well below the eight percent-plus growth rate experienced in the past few years.

There is also a multiplier effect on the domestic economy. Higher international oil prices lead to domestic inflation, increased input costs and higher budget deficits which push up interest rates and slow down the wheel of growth.

In the last 10 years, India has shelled out nearly $700 billion only on crude imports. In fact, oil imports have eaten up 40 percent of India’s export earnings in the last five years. Crude imports have considerably pulled down India’s high GDP growth.

In the external sector, higher imports lead to a deterioration in the balance of payments and put downward pressure on exchange rates. This, in turn, makes imports expensive.

Also, exports lose in nominal value terms and this leads to a drop in real national income.

“There could not be a more direct cause and effect relation than high oil prices retarding economic growth of oil importing countries,” said S Jaipal Reddy, former Petroleum Minister, who was unceremoniously removed last year.

Going forward, India would see even higher outflow of forex to meet its oil import obligations. There are four observations that point to such possibility.

First, the country’s per capita crude consumption is still as low as one-fifth of the global average.

Second, the country’s import dependence has been increasing steadily over the years and is expected to reach 90 percent by 2020 from the current 81 percent.

Third, the share of crude imports as a percentage of total imports has increased

India’s crude oil production & consumption (tbpd)*

steadily from around 14 percent in 1991 to 33 percent in 2012. Fourth, crude prices are expected to see further buoyancy with increased demand, truncated production and periodic shocks. Along with this, the continued growth of the Indian automobile sector and absence of any alternative fuels to run the vehicles would lead to increased imports.

In coal, we believe

It’s more than an economic coincidence that both India and China, the economies that drive the world market today, were found to be endowed with abundant coal reserves.

While China, which is three times the size of India, has around 12 percent of the world’s proven coal reserves, India’s share is around 10 percent.

Without the dry fuel deposits, these countries would have found it extremely difficult to fuel their growth aspirations.

Between the two neighbours, India, by merit of its lower production, could expect to sustain its coal reserves for a longer period,

India’s oil production & consumption growth (%)

4000

90.00%

3500

80.00% 70.00%

3000

60.00%

2500

50.00%

2000

40.00%

1500

30.00%

1000

20.00% 10.00%

500

0.00%

0

-10.00% -20.00% production

* Thousand barrels per day

8 Coal Insights, November 2013

consumption

Production

Consumption

Cover Story India’s oil import bill ($ billion)

180 160

140

140 120 80

68

75.7

250 200

106

100 60

169

Estimated life of reserves for various fuel types (in years) 196

150

79.55

112 100

48

40

50

50

20 0 2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

10 Coal Insights, November 2013

31

0

Import bill

ie, more than 190 years. This is way above the global average of 112 years. Also, it is much higher than the life of the country’s crude or gas reserves, which are estimated to sustain for only 20 and 31 years, respectively, far below the global average of around 50 and 60 years.

It is interesting to note that much of India’s coal deposits were discovered after 1991, when the economy started pacing up.

It is also remarkable that at about the same time information technology – essentially a services sector – started flourishing in India, with remarkable ease and spontaneity.

“From the perspective of energy endowments, the growth of IT perfectly matched the Indian conditions. As compared to manufacturing, the services sector is much less energy intensive.

So countries like India should ideally go for a services-led growth which happened in the software industry ,” said an energy sector analyst. This advantage, however, has started waning due to the increased energy consumption by the huge workforce associated with this growing sector.

Thankfully, much of the incremental energy demand in post-liberalisation India comes in the form of electricity and cooking fuel which are catered to by coal and natural gas, respectively.

While the shortage of coal for power sector expansion continues to be a matter of concern, the fact remains that the country has got the reserves and can always augment it by removing hurdles and taking effective measures.

This, however, is not the case with oil, simply because there is just not enough reserve to exploit! While both the reserves of crude oil and its production levels in India

20

60

Coal

Crude oil

Estimated life of reserves in India

have seen a steady growth during the last two decades, the figures still remain only marginal. Moreover, in the last three years (2009-10 to 2011-12), the crude oil reserves in India have actually shown a decline, from 775 million tons (mt) to 760 mt, according to official data. In contrast, India’s coal reserves (proven), during the same period, have increased from 109 billion tons to 118 billion tons.

Can coal substitute oil?

The big question is, could India’s abundant coal resources actually substitute oil? In the 1970s’ US, coal was used primarily to replace oil in the manufacturing sector. The US planners found that, because of technical or cost restraints in other consuming sectors, “the manufacturing industries are the most likely candidates for expanded direct use of solid coal”.

In India, however, coal and gas are the major fuel types used by the industry, including manufacturing, while crude oil is primarily used by the transportation sector.

There are, of course, numerous uses of crude found in today’s world, some of them as varied as ink, crayons, computer cases, shampoo and paint. However, the majority of the crude production goes into fuelling the automobiles sector.

Natural gas

Global average life of reserves

An estimate shows that around 51 percent of petroleum products consumption in India is accounted for by automobiles.

This is followed by 18 percent usage by domestic (LPG and kerosene), 14 percent by industry, 13 percent by commercial and others establishments and four percent by the agricultural sector.

Within the transportation sector, the consumption of petroleum has increased significantly over the years. One interesting observation, as pointed out by a transportation sector analyst, is that this industry was earlier dominated by coal.

From the 1950s to the 1970s, railway was the dominant mode of transport in the country and coal, being the primary type of fuel used by the railways, was the dominating energy source. The pre-eminence of the railways was preferable from the fuel efficiency point of view.

In fact, transport by the road sector is estimated to consume significantly more fuel than the railways.

However, the huge cost of new projects, land constraints within city limits, low revenue realisations and the state ownership led to the growth of road transport. From the 1970s onwards, the road sector started gaining share and thus petroleum took over from coal.

From the perspective of energy endowments, the growth of IT perfectly matched the Indian conditions. As compared to manufacturing, the services sector is much less energy intensive. So countries like India should ideally go for a services-led growth which happened in the software industry.

Tear along the dotted line

82 Coal Insights, November 2013 Tear along the dotted line