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