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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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- Pipit Mutiara Jaya. PT, Indonesia
- Ceylon Electricity Board - Sri Lanka
- Eastern Energy - Thailand
- PTC India Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Sojitz Corporation - Japan
- India Bulls Power Limited - India
- Australian Coal Association
- The State Trading Corporation of India Ltd
- Siam City Cement - Thailand
- Sindya Power Generating Company Private Ltd
- PNOC Exploration Corporation - Philippines
- ICICI Bank Limited - India
- Sarangani Energy Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Orica Australia Pty. Ltd.
- Bangladesh Power Developement Board
- Salva Resources Pvt Ltd - India
- Marubeni Corporation - India
- Electricity Generating Authority of Thailand
- South Luzon Thermal Energy Corporation
- Africa Commodities Group - South Africa
- Globalindo Alam Lestari - Indonesia
- Sakthi Sugars Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Ministry of Finance - Indonesia
- Iligan Light & Power Inc, Philippines
- Deloitte Consulting - India
- Antam Resourcindo - Indonesia
- GAC Shipping (India) Pvt Ltd
- Parliament of New Zealand
- Gujarat Electricity Regulatory Commission - India
- Romanian Commodities Exchange
- Bhatia International Limited - India
- Toyota Tsusho Corporation, Japan
- Mercator Lines Limited - India
- AsiaOL BioFuels Corp., Philippines
- Electricity Authority, New Zealand
- Ministry of Mines - Canada
- Semirara Mining and Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Kaltim Prima Coal - Indonesia
- Semirara Mining Corp, Philippines
- TeaM Sual Corporation - Philippines
- Minerals Council of Australia
- Orica Mining Services - Indonesia
- White Energy Company Limited
- VISA Power Limited - India
- IHS Mccloskey Coal Group - USA
- TNB Fuel Sdn Bhd - Malaysia
- The Treasury - Australian Government
- Alfred C Toepfer International GmbH - Germany
- Bayan Resources Tbk. - Indonesia
- Savvy Resources Ltd - HongKong
- ASAPP Information Group - India
- Jorong Barutama Greston.PT - Indonesia
- Makarim & Taira - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- PowerSource Philippines DevCo
- Directorate Of Revenue Intelligence - India
- Thai Mozambique Logistica
- Chamber of Mines of South Africa
- Tata Chemicals Ltd - India
- Timah Investasi Mineral - Indoneisa
- Altura Mining Limited, Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- IEA Clean Coal Centre - UK
- Rio Tinto Coal - Australia
- Ambuja Cements Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Chettinad Cement Corporation Ltd - India
- SMG Consultants - Indonesia
- Oldendorff Carriers - Singapore
- Cement Manufacturers Association - India
- Coalindo Energy - Indonesia
- Ministry of Transport, Egypt
- Bharathi Cement Corporation - India
- Interocean Group of Companies - India
- Indonesian Coal Mining Association
- Kartika Selabumi Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Standard Chartered Bank - UAE
- Sical Logistics Limited - India
- Indian Oil Corporation Limited
- GVK Power & Infra Limited - India
- GMR Energy Limited - India
- Planning Commission, India
- Energy Link Ltd, New Zealand
- Jaiprakash Power Ventures ltd
- Central Java Power - Indonesia
- Global Business Power Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- Karaikal Port Pvt Ltd - India
- Parry Sugars Refinery, India
- Neyveli Lignite Corporation Ltd, - India
- Kapuas Tunggal Persada - Indonesia
- Indika Energy - Indonesia
- Larsen & Toubro Limited - India
- Kepco SPC Power Corporation, Philippines
- Barasentosa Lestari - Indonesia
- Essar Steel Hazira Ltd - India
- McConnell Dowell - Australia
- Billiton Holdings Pty Ltd - Australia
- Siam City Cement PLC, Thailand
- Directorate General of MIneral and Coal - Indonesia
- Coastal Gujarat Power Limited - India
- Posco Energy - South Korea
- Meralco Power Generation, Philippines
- Coal and Oil Company - UAE
- Independent Power Producers Association of India
- Renaissance Capital - South Africa
- Simpson Spence & Young - Indonesia
- Bhushan Steel Limited - India
- Anglo American - United Kingdom
- Borneo Indobara - Indonesia
- Indogreen Group - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kalimantan Lumbung Energi - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kobexindo Tractors - Indoneisa
- Wilmar Investment Holdings
- Georgia Ports Authority, United States
- Star Paper Mills Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Price Waterhouse Coopers - Russia
- Maharashtra Electricity Regulatory Commission - India
- Port Waratah Coal Services - Australia
- Kohat Cement Company Ltd. - Pakistan
- European Bulk Services B.V. - Netherlands
- Sree Jayajothi Cements Limited - India
- Economic Council, Georgia
- Madhucon Powers Ltd - India
- Straits Asia Resources Limited - Singapore
- New Zealand Coal & Carbon
- Global Coal Blending Company Limited - Australia
- Central Electricity Authority - India
- Petrochimia International Co. Ltd.- Taiwan
- International Coal Ventures Pvt Ltd - India
- Commonwealth Bank - Australia
- Dalmia Cement Bharat India
- CNBM International Corporation - China
- San Jose City I Power Corp, Philippines
- Mercuria Energy - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Power Finance Corporation Ltd., India
- SMC Global Power, Philippines
- Attock Cement Pakistan Limited
- London Commodity Brokers - England
- Thiess Contractors Indonesia
- Lanco Infratech Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Mintek Dendrill Indonesia
- Indian Energy Exchange, India
- Pendopo Energi Batubara - Indonesia
- Therma Luzon, Inc, Philippines
- Vizag Seaport Private Limited - India
- Malabar Cements Ltd - India
- Medco Energi Mining Internasional
- Edison Trading Spa - Italy
- Merrill Lynch Commodities Europe
- Energy Development Corp, Philippines
- Riau Bara Harum - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Xindia Steels Limited - India
- Tamil Nadu electricity Board
- Latin American Coal - Colombia
- Wood Mackenzie - Singapore
- Meenaskhi Energy Private Limited - India
- Carbofer General Trading SA - India
- Jindal Steel & Power Ltd - India
- Videocon Industries ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Grasim Industreis Ltd - India
- Bhoruka Overseas - Indonesia
- Baramulti Group, Indonesia
- Maheswari Brothers Coal Limited - India
- Global Green Power PLC Corporation, Philippines
- Eastern Coal Council - USA
- Metalloyd Limited - United Kingdom
- Formosa Plastics Group - Taiwan
- Kumho Petrochemical, South Korea
- Bukit Makmur.PT - Indonesia
- Intertek Mineral Services - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Uttam Galva Steels Limited - India
- Aditya Birla Group - India
- Vedanta Resources Plc - India
- Gujarat Sidhee Cement - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Petron Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Kideco Jaya Agung - Indonesia
- Heidelberg Cement - Germany
- Agrawal Coal Company - India
- Aboitiz Power Corporation - Philippines
- MS Steel International - UAE
- Trasteel International SA, Italy
- Ind-Barath Power Infra Limited - India
- Singapore Mercantile Exchange
- Bulk Trading Sa - Switzerland
- Banpu Public Company Limited - Thailand
- CIMB Investment Bank - Malaysia
- Cigading International Bulk Terminal - Indonesia
- Australian Commodity Traders Exchange
- Bukit Baiduri Energy - Indonesia
- SN Aboitiz Power Inc, Philippines
- OPG Power Generation Pvt Ltd - India
- Mjunction Services Limited - India
- The University of Queensland
- Goldman Sachs - Singapore
- Indo Tambangraya Megah - Indonesia
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