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