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Wednesday, 20 November 19
FOREIGN DIRECT INVESTMENTS IN COMMERCIAL COAL MINING IN INDIA? - DIPESH DIPU
 In August 2019, Government of India announced its approval for Foreign Direct Investment (FDI) for coal mining, processing and sale. Not that FDI in coal mining sector was new, but novelty in that was that government now permitted foreign ownership of coal mines for commercial sale of coal produced from such mines. He justifications provided by government sources included need for competition in a sector that has been traditionally dominated by government-owned companies Coal India Limited and Singareni Collieries Company Limited; need for enhanced production as here has been shortfall in meeting demand; and, need for newer technologies that may bring in sustainability to coal mining. These indeed are commendable objectives and opening up the sector for foreign participation may certainly be considered a step in the right direction. However, public policy needs to be grounded in realism, and the reality of attractiveness of commercial coal mining in India does not bode well for foreign participation.
The response of government-owned companies for coal blocks on offer for allotment for commercial coal mining was announced in early August 2019 provides the evidence. Nine coal blocks were put on offer for sale of coal in markets and the eligibility for these were restricted to government-owned companies including the state government-owned ones. There were, however, only three coal blocks[1] that received applications by NMDC Limited, Jharkhand State Mineral Development Corporation and Madhya Pradesh State Mining Corporation. This lukewarm response may indicate towards the market sentiments for commercial coal mining in India. It must also be considered here that the coal blocks for allotment for government-owned companies do not have the two-stage auction based bidding for winning the blocks and, thus, the pay-out required to win these coal blocks may be lower in comparison to coal blocks put out for auctions. So, even with lower additional pay-out to government in the form of premium the coal blocks have not found many takers. There may be several underlying economic reasons, which are amplified for foreign participants, and thus, require consideration to evaluate if this approval for FDI in commercial coal mining would have any impact and if it would meet its stated objectives.
The first and the foremost is the economic feasibility of these mines. The foreign, and indeed any private company, would have to participate in auction process for winning a coal block, and commit to a competitive premium to access the resources. This has been an impediment for private sector participation in India, given the evidence of coal blocks awarded for captive consumption in power and non-regulated sectors that include cement, steel and other approved end users. There seems to be some sanity dawning on participants on these auction with every successive rounds of auction, seen from the lower winning premiums, and hence, it may be expected that the trend may continue. Nonetheless, the premium will certainly erode the margins for commercial miners, the extent of this erosion would be a function of degree of competition for the coal blocks. The margins are also likely to be uncertain in view of the price volatility of coal, which in Indian market is pegged with CIL price and a certain premium that reflects typically the discount that IL prices tend to have over energy-equivalent international prices. This uncertainty of prices is likely to be confounded by the uncertainty in demand-supply gap that these commercial miners are required to fulfil. There has been a shortfall in supply in the recent past, evident from the rise in coal imports in the last two years even with the stated objective of the government to reduce coal imports. This may present itself as an opportunity. However, the question is whether this shortfall is likely to sustain, and thus, create a marketplace for commercial miners. With a slump in thermal power generation and nearly absent pipeline of new coal based projects, this assumption may be quite a big one to make and decide in favour of making foreign direct investment in Indian coal mining.
Other important risks pertain to project execution. There have been several impediments in coal mining project implementations, such as procurement of licenses and permits, acquisition of land and rehabilitation and resettlement of project affected people. These, apart from the procedural challenges, involve risk of reputation. Business practices on all these accounts in mining sector have often been marred with controversies and have led to perceptions of externalities in these processes having significant influence on the outcomes. Foreign participants in Indian mining have been wary of these, and hence, have had little success to show even though they have had offices and a few exploration and contract mining projects in India. Apart from reputation, the risks in procurement of licenses and land acquisition create the risks of project delays, which may then translate into cost escalations, thereby impacting project economics. Coal mining projects may have such challenges in attracting foreign direct investment.
There are challenges of talent shortage and financing as well. Innovative technologies that the foreign miners are likely to bring in India will require high quality geo-statisticians, geologists, mine planners and mining engineers. India does produce graduates in these areas of study but quantities do no necessarily reflect quality, which are further compounded by the brain drain of talent into other industries, primarily, information technology. Mining industry in general, and coal mining in particular, has not been able to retain relent in the last decade or so, with advent of opportunities for the smart geoscientists and engineers in alternate industries. Foreign mining companies may find this crippling.
There are challenges in financing too. Coal mining projects may have been good candidates for resource-based financing, but that has not happened on account of several factors, not the least of those being dominance of government-owned companies priding themselves on debt-free balance sheets, and the quality of geological information that may be inferior to global standards. The market for debt for coal mining then often reduces itself to equipment financing with the equipment being securitised to the lenders. Globally preferred model of equipment leasing is still in its relatively early stages of comprehension and acceptance in Indian mining. With limited options of raising finances, the higher degree of equity investments may also be a deterrent for foreign investors as the may have comparable projects competing for scarce capital.
Coal mining industry has been on a downward spiral globally. Foreign large miners have divested or are divesting their stakes in coal projects. Global bankers have committed themselves to not financing coal and coal based power projects. Insurance companies are shying away from coal projects too. The ecosystem for coal mining project execution is dying. Epitaphs are being written on coal and its demise is predicted by governments, investors and policy analysts wold over. But for the coal addiction of Asia, China and India in particular, the demise may have been sooner. Under such gloomy outlook for the industry, with coal mining companies filing for bankruptcies frequently, it would be tough to get these foreign companies to look at Indian destinations favourably. An industry staring at terminal decline may not witness new investors, and old ones that may have been facing severe challenges in their home countries to look out for opportunities in India.
Optimism at this point of time of foreign miners participating in Indian coal mining sector, that presents a challenging business environment, may be misplaced. Only when the government calls for applications for coal blocks for sale of coal with permitted participation for foreign direct investment that the final picture shall emerge.
By Dipesh Dipu
Energy, Natural Resources and Infrastructure Expert
This article originaly published on economictimes and Linkedin
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- Uttam Galva Steels Limited - India
- Indian Oil Corporation Limited
- Maheswari Brothers Coal Limited - India
- Energy Link Ltd, New Zealand
- Chettinad Cement Corporation Ltd - India
- Posco Energy - South Korea
- Holcim Trading Pte Ltd - Singapore
- The State Trading Corporation of India Ltd
- Ministry of Mines - Canada
- Karbindo Abesyapradhi - Indoneisa
- Straits Asia Resources Limited - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- McConnell Dowell - Australia
- Videocon Industries ltd - India
- Toyota Tsusho Corporation, Japan
- Petrochimia International Co. Ltd.- Taiwan
- Kideco Jaya Agung - Indonesia
- Ambuja Cements Ltd - India
- Goldman Sachs - Singapore
- Samtan Co., Ltd - South Korea
- Bank of Tokyo Mitsubishi UFJ Ltd
- White Energy Company Limited
- Riau Bara Harum - Indonesia
- Central Java Power - Indonesia
- Kapuas Tunggal Persada - Indonesia
- SN Aboitiz Power Inc, Philippines
- Bhushan Steel Limited - India
- Port Waratah Coal Services - Australia
- Star Paper Mills Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Malabar Cements Ltd - India
- Petron Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- TeaM Sual Corporation - Philippines
- Mjunction Services Limited - India
- Lanco Infratech Ltd - India
- Madhucon Powers Ltd - India
- Orica Mining Services - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Rashtriya Ispat Nigam Limited - India
- Sree Jayajothi Cements Limited - India
- Essar Steel Hazira Ltd - India
- MS Steel International - UAE
- Aditya Birla Group - India
- Indika Energy - Indonesia
- Singapore Mercantile Exchange
- Standard Chartered Bank - UAE
- Siam City Cement - Thailand
- Marubeni Corporation - India
- Trasteel International SA, Italy
- Directorate General of MIneral and Coal - Indonesia
- Bukit Makmur.PT - Indonesia
- Billiton Holdings Pty Ltd - Australia
- London Commodity Brokers - England
- Miang Besar Coal Terminal - Indonesia
- Coalindo Energy - Indonesia
- Semirara Mining Corp, Philippines
- Romanian Commodities Exchange
- Neyveli Lignite Corporation Ltd, - India
- Indo Tambangraya Megah - Indonesia
- GMR Energy Limited - India
- Formosa Plastics Group - Taiwan
- Electricity Authority, New Zealand
- LBH Netherlands Bv - Netherlands
- Coastal Gujarat Power Limited - India
- Salva Resources Pvt Ltd - India
- Xindia Steels Limited - India
- Oldendorff Carriers - Singapore
- GAC Shipping (India) Pvt Ltd
- Merrill Lynch Commodities Europe
- Sinarmas Energy and Mining - Indonesia
- Chamber of Mines of South Africa
- Mercator Lines Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Semirara Mining and Power Corporation, Philippines
- PowerSource Philippines DevCo
- CNBM International Corporation - China
- Sarangani Energy Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- Gujarat Sidhee Cement - India
- Grasim Industreis Ltd - India
- Manunggal Multi Energi - Indonesia
- Latin American Coal - Colombia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- VISA Power Limited - India
- Orica Australia Pty. Ltd.
- Coal and Oil Company - UAE
- Africa Commodities Group - South Africa
- Edison Trading Spa - Italy
- Baramulti Group, Indonesia
- Medco Energi Mining Internasional
- Global Coal Blending Company Limited - Australia
- International Coal Ventures Pvt Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- ICICI Bank Limited - India
- Barasentosa Lestari - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Indian Energy Exchange, India
- Ministry of Transport, Egypt
- CIMB Investment Bank - Malaysia
- Agrawal Coal Company - India
- Iligan Light & Power Inc, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Commonwealth Bank - Australia
- Banpu Public Company Limited - Thailand
- New Zealand Coal & Carbon
- Mercuria Energy - Indonesia
- Indonesian Coal Mining Association
- Heidelberg Cement - Germany
- Ceylon Electricity Board - Sri Lanka
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- San Jose City I Power Corp, Philippines
- Thai Mozambique Logistica
- Australian Coal Association
- Energy Development Corp, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Bharathi Cement Corporation - India
- Krishnapatnam Port Company Ltd. - India
- Savvy Resources Ltd - HongKong
- Pipit Mutiara Jaya. PT, Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Kartika Selabumi Mining - Indonesia
- Antam Resourcindo - Indonesia
- Global Green Power PLC Corporation, Philippines
- Larsen & Toubro Limited - India
- Minerals Council of Australia
- South Luzon Thermal Energy Corporation
- Tamil Nadu electricity Board
- AsiaOL BioFuels Corp., Philippines
- Jindal Steel & Power Ltd - India
- Carbofer General Trading SA - India
- ASAPP Information Group - India
- Aboitiz Power Corporation - Philippines
- Mintek Dendrill Indonesia
- IEA Clean Coal Centre - UK
- Borneo Indobara - Indonesia
- Anglo American - United Kingdom
- Vedanta Resources Plc - India
- Ind-Barath Power Infra Limited - India
- Economic Council, Georgia
- Kobexindo Tractors - Indoneisa
- Sojitz Corporation - Japan
- Renaissance Capital - South Africa
- Rio Tinto Coal - Australia
- Ministry of Finance - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Bukit Baiduri Energy - Indonesia
- Wilmar Investment Holdings
- SMG Consultants - Indonesia
- Eastern Energy - Thailand
- Therma Luzon, Inc, Philippines
- PNOC Exploration Corporation - Philippines
- Interocean Group of Companies - India
- GVK Power & Infra Limited - India
- Price Waterhouse Coopers - Russia
- Gujarat Electricity Regulatory Commission - India
- OPG Power Generation Pvt Ltd - India
- India Bulls Power Limited - India
- Bangladesh Power Developement Board
- Tata Chemicals Ltd - India
- Georgia Ports Authority, United States
- European Bulk Services B.V. - Netherlands
- Vijayanagar Sugar Pvt Ltd - India
- The University of Queensland
- Thiess Contractors Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Metalloyd Limited - United Kingdom
- Directorate Of Revenue Intelligence - India
- Electricity Generating Authority of Thailand
- Bhoruka Overseas - Indonesia
- Pendopo Energi Batubara - Indonesia
- Global Business Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Central Electricity Authority - India
- Kepco SPC Power Corporation, Philippines
- Wood Mackenzie - Singapore
- Bayan Resources Tbk. - Indonesia
- Independent Power Producers Association of India
- Kumho Petrochemical, South Korea
- Vizag Seaport Private Limited - India
- Power Finance Corporation Ltd., India
- TNB Fuel Sdn Bhd - Malaysia
- Binh Thuan Hamico - Vietnam
- IHS Mccloskey Coal Group - USA
- Leighton Contractors Pty Ltd - Australia
- Jaiprakash Power Ventures ltd
- Makarim & Taira - Indonesia
- Deloitte Consulting - India
- Alfred C Toepfer International GmbH - Germany
- The Treasury - Australian Government
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bhatia International Limited - India
- Meenaskhi Energy Private Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Simpson Spence & Young - Indonesia
- Altura Mining Limited, Indonesia
- Karaikal Port Pvt Ltd - India
- Cement Manufacturers Association - India
- Parliament of New Zealand
- Sical Logistics Limited - India
- Kaltim Prima Coal - Indonesia
- Bulk Trading Sa - Switzerland
- Australian Commodity Traders Exchange
- PTC India Limited - India
- Indogreen Group - Indonesia
- Eastern Coal Council - USA
- Intertek Mineral Services - Indonesia
- Meralco Power Generation, Philippines
- Attock Cement Pakistan Limited
- SMC Global Power, Philippines
- Sindya Power Generating Company Private Ltd
- Planning Commission, India
- Siam City Cement PLC, Thailand
- Parry Sugars Refinery, India
- Dalmia Cement Bharat India
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