core sector communique

Hunger for coal in fast-growing economy

COAL may be dismissed as a dirty fuel by environmentalists, but in India demand for the commodity is huge. In fact, the country’s ambitious plans to increase its power generating capacity are overly dependent on coal supplies.

Coal miners are, however, facing problems as an increasingly vocal environmental lobby, is forcing the government to impose strict norms for companies seeking rights over coal blocks. Many of the coal reserves are also located in states in eastern India, where large parts are under the control of Maoists and the coal mafia.

Coal-fired thermal plants account for half of India’s 160,000 MW power capacity. With the government pushing for the setting up of ultra mega power plants (UMPP) – each with a capacity of 4,000 MW using super-critical technology, and costing about Rs200 billion (about $4.4 billion) – demand for coal is expected to surge.

Launched in 2006, the UMPP scheme faltered because of lack of political drive. Only four UMPPs have been sanctioned so far – three having gone to Reliance Power and one to Tata Power. The government is now trying to revive the project, with three new projects expected to be allocated to private players in the new financial year beginning April 1. There are also plans to ultimately operate about 16 UMPPs across India, having access to coal blocks.

The environment ministry had initially raised objections to the allotment of coal blocks and had come out with a ‘go, no-go’ policy for pitheads in reserve and forest areas. According to the coal ministry, this covered more than 200 blocks and with a potential of producing 660 million tonnes of coal annually, more than India’s existing coal production. This quantity of coal is adequate to generate 130,000 MW of power, says the coal ministry.

However, the ministry is expected to dilute the stringent standards following pressure from other ministries, including coal. A ministerial group comprising a dozen members, is discussing the contentious issue of allowing more licences for coal mining.

India has been missing out on its power generation capacities over the past few years. But the government believes that it has to boost production capacities to ensure continued growth of the economy at nine-plus per cent annually.

According to Ravi Uppal, CEO and managing director, L&T Power, India used to add a mere 3,000 to 4,000 MW of additional capacities every year. But this has now gone up to 20,000 MW in new capacities every year. During the 11th Five Year plan, the government had set a target of 78,000 MW additional capacity; while the target is likely to be missed, a record 52,000 MW is expected to be added during the plan period.

For the 12th Five Year plan, the government has set a target of 105,000 MW. Analysts believe that this is an achievable goal, especially if a dozen UMPPs become operational by the end of the plan.

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INDIA’S coal shortage is expected to worsen over the coming years. In fiscal 2011-12, for instance, demand for coal is expected to touch almost 700 million tonnes, while domestic production will be a little over 550 million tonnes. The country will have to import nearly 145 million tonnes of coal next year.

Sriprakash Jaiswal, the coal minister, says there will be pressures on international coal supplies in view of the nuclear crisis in Japan; many countries are expected to go slow on their nuclear power generation capacities and depend increasingly on coal to fire their thermal plants.

India’s largest coal producer – and also the top-ranking in the world – Coal India Ltd, is also expected to end the fiscal – March 31, 2011 – with a production of 435 million tonnes, way below its target of 460 million.

Coal India, along with other state-owned behemoths including power major NTPC Ltd, steel giants Steel Authority of India Ltd and Rashtriya Ispat Nigam and mining major NMDC, has set up a subsidiary, International Coal Ventures Pvt Ltd (ICVL), to secure coal assets abroad. However, unlike the private sector steel, energy and metals majors, ICVL has still not been able to sign a single deal so far.

NMDC, the country’s largest iron ore producer, is in talks with government of British Columbia in Canada, for investing in coal mines there.

“We have discussed with geologists there and also with the concerned minister for mines on the availability of coking coal properties in British Columbia,” says Rana Som, chairman NMDC. “The province’s officials had briefed us on picking up stake in coking coal mines there.” NMDC, however, is more interested in acquiring a mine and operating it, instead of just picking up a stake.

Private steel major Tata Steel is also keen at looking at the assets in British Columbia. NMDC is also looking at the possibility of acquiring or operating mines in the US, Russia and Australia, says Som. NMDC, which has two coal blocks in Madhya Pradesh, is diversifying into the steel business.

NMDC is also looking at the possibility of acquiring three coal mines in Russia from Kolmar Coal Co. But Japanese and Korean companies are also in the race to acquire these assets.

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PRIVATE sector players have been much quicker in their response and have acquired several overseas assets.

Last week, for instance, Monnet Ispat & Energy Ltd, the country’s second-largest coal-based sponge iron producer and an integrated steel player, acquired an Indonesian coal mine for $24 million. The acquisition gives it access to one of the largest thermal coal mines, spread over 25,000 hectares.

“The acquisition is of strategic importance for the group as the logistic of the mine is excellent,’’ says Sandeep Jajodia, executive vice-chairman and managing director, Monnet group.

“And being located in Sumatra, the shipping cost and low transit time to India will make the coal very cost-effective. It will also provide, low-cost fuel for our planned coast-based power projects.’’

MGL gets access to good grade coal, having very low sulphur content.

Indonesia plans to impose a ban on the export of low-grade thermal coal, which could affect the supply of coal to India. The world’s largest thermal coal exporter, it plans to ban exports of coal under the 5,600-kcal mark.

About 40 Indian companies are engaged in mining or exploring coal blocks in India. Tata Power has a 30 per cent stake in two large coal mines, while the Adani group – the largest coal importer in India – plans to build a $1.6 billion mining infrastructure in Indonesia.

India has been meeting its shortage of coal by importing from countries such as Indonesia, Australia and South Africa. Last year, India’s imports from South Africa jumped by more than 50 per cent.

In fact, the domestic industry in South Africa is worried that the country might face a shortage of coal as much of it is exported to India. Eskom Holdings, South Africa’s leading power utility, is concerned that much of low-grade coal is being sent to India, which could cause a shortage in South Africa.

Indian business groups are in fact involved in several possible deals in the coal industry across the globe. The $30 billion Aditya Birla group, for instance, is eyeing acquisition of Whitehaven Coal of Australia, which is valued at $3.5 billion. Reliance Power, part of the Anil Dhirubhai Ambani Group is also learnt to be keen on acquiring the company. The Aditya Birla group, which in recent years has made multi-billion-dollar acquisitions – including Canadian aluminium major Novelis for about $6 billion – has a huge requirement for coal for its aluminium firm Hindalco and for its cement business.

Tata Steel, which acquired European steel major Corus a few years ago, is also involved in a fight with Rio Tinto over acquisition of Australian coking coal firm Riversdale Mining. Rio Tinto was recently forced to raise its offer for Riversdale, after Tata Steel hiked its holding in the company from 24.2 per cent to 27.14 per cent. The Indian company acquired a stake in Riversdale with an eye on its coal assets in Mozambique and South Africa. The coal is needed for its subsidiary, Corus, which requires about 10 million tonnes of coal annually.

Other private sector majors who are keen for overseas coal assets include JSW Energy, the Essar Group, GVK group and Lanco Infratech. All of them have been involved in acquisitions – or talks relating to acquisitions – in recent months.