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Better Indian coal production prospects

World Coal,

Reuters columnist Clyde Russell has highlighted that the belief among many that Indian coal imports will inevitably rise as a result of rising demand is predicated on the view that domestic coal output will continue to disappoint.

However, there are signs that India is taking the right steps to boost its domestic coal industry. The new government of Prime Minister Narendra Modi has shown some determination to reform India’s cast coal sector, starting with making Coal India more efficient. The government raised approximately US$3.6 billion by selling a 10% stake in Coal India last month, part of its plan to raise US$10 billion by selling assets.

Perhaps more important, from a coal market perspective, than the cash raised was the level of interest shown by investors, with the share offer oversubscribed. This is not only a vote of confidence that the government is prepared to tackle the bureaucratic issues holding Coal India back, but will also act to improve the company’s rather dismal operational record, Russell suggests.

Having more private investors on board will help drive change within Coal India, given fund managers are likely to push for improved returns and ask comfortable questions of management should they fail to deliver.

More competition is coming

India is also pushing ahead with plans to open up the coal mining sector to private and international investors, Piyush Goyal, the Coal and Power Minister announced on 8 January.

This comes despite union opposition to the move, however a planned five day strike in January was called off after two days when the government assured a committee would be formed to address workers concerns over the process.

So far, global miners have been cool on the prospect of investing in India, most likely because of complex bureaucratic procedures and a playing field titled in favour of Coal India.

The coal divisions of the large miners are also hamstrung by the current low price environment, meaning limited cash is available for new investments as management focus of trying to run existing operations as efficiently as possible.

It is more likely that private Indian companies will seek to get into domestic coal mining, with several expected to bid for blocks, Russell explains.

These private companies, which could include GVK and Adani Group have experience in mining, as well as access to newer technologies and expertise. If they do enter the market, they will no doubt be more efficient than Coal India, once again putting pressure on the state giant to lift its game.

India aims to double annual coal output to 1.5 billion t by 2020, an ambitious target that if achieved would probably eliminate much of the need for imported fuel, especially thermal coal for power generation.

It is still very early days in getting anywhere close to that target, and it will be worth watching to see if Coal India does make efficiency and output gains, if the government can manage to cut red and green tape and how much private companies are willing to invest to get a foothold in the industry, Russell claims.

The main point is that the risks to India’s domestic coal output are no longer to the downside. If anything, the risk is now that production will surprise on the upside, maybe not immediately but certainly over the next few years. 

Adapted from a report by Emma McAleavey.
Source: Reuters

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