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