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Regional Report – India: a fresh start

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World Coal,

Ng Weng Hoong, Asia Correspondent, World Coal.

The spirit may be willing but weak market conditions and growing opposition from environmental, business and labour groups are combining to suppress India’s pent-up desire to heal its struggling coal industry.

Following its election to power last May, the government of Prime Minister Narendra Modi has made a top priority of reforming India’s coal supply system, which lies at the heart of the country’s energy crisis. The government has set bold targets to double domestic coal production and cease imports by 2019, as well as promising to provide round-the-clock electricity to all of the country’s estimated 1.3 billion citizens by 2022. As part of its efforts to expand India’s coal reach at home and abroad, the government said it wants to open up the sector to foreign participation for the first time.

While the move might eventually force India’s coal industry to become more efficient, the government has failed to present a viable plan to deal with the short-term pain of mass job losses and coal and electricity price hikes. Furthermore, with coal prices hovering at a five-year low and likely to fall further, foreign companies are unlikely to be tempted to rush in. The government, perhaps unsurprisingly, is unable to set a deadline or schedule on how it plans to open up the sector to private participation.

Coal ministry’s ambitious plans

The Ministry of Coal has made ambitious projections that foreign investors will help India’s privately owned mines boost domestic coal production from less than 50 million t last year to 400 million t by 2019. Minister of Power and Energy, Piyush Goyal, has also forecast that CIL, notorious for missing production targets, will more than double output from 462 million t for the year ending 31 March 2014 to 1 billion t five years later.

Speaking at an industry conference in New Delhi in October, Goyal confidently predicted the combined production increases from CIL and private mines would enable India, the world’s third largest coal buyer, to cease all imports by 2018. India’s coal imports reached a record 204.1 million t in 2013, with domestic demand exceeding 772.8 million t to further dwarf domestic production at just 568.7 million t. The country spent more than US$16 billion on coal imports, contributing to its rising fiscal deficit.

Modi blessed by the collapse in energy prices

For now, these policy battles have failed to dent the popularity of India’s new charismatic leader, who shone on the international stage at the G20 summit in Australia and during an official visit to the US. Modi's political fortunes have also received an unexpected boost from the sharp plunge in global oil, gas and coal prices. The huge savings in the country’s energy expenses has masked the continuing seriousness of the power crisis many consider as the biggest challenge to India’s long-term economic development.

“India’s economy is fragile, struggling with low growth and high inflation. One of the key factors underlying the difficult economic outlook is India’s unfolding energy crisis,” said Rajiv Biswas, an economist at IHS.

According to the Central Electricity Authority (CEA), coal stockpiles at India’s 103 main coal-fired power plants plunged to 7.2 million t in October, sufficient to meet less than a week of consumption. This comprised 6.58 million t of domestically produced coal and 706 000 t of imports. It is India’s lowest coal stockpile level since the summer of 2012, which contributed to the massive shutdown of many of the nation’s power plants. It resulted in a world record disruption of electricity supply to some 700 million people for three days.

CRISIL Research, India’s largest independent research house, described the expected continuing growth in global supplies of coal, natural gas and coal as “a blessing” for the nation’s economy, which slowed sharply under the weight of rising energy costs over the last several years. “India’s import bill will grow significantly [more slowly] in the next five years than it has in the last five as prices of crude oil, thermal coal and LNG come under pressure. Between fiscals 2010 and 2014, the fuel import bill grew 14% a year because of rising prices and healthy growth in import volumes, especially of coal and LNG,” it said.

But as a result of sustained low energy prices, CRISIL expects India’s fuel import expenses to grow at a sharply reduced rate of 1.6%/yr over the next five years, compared with the previous five.

Imports continue to grow

Analysts have dismissed the Indian government’s plan for the country to become coal self-sufficient this decade. Instead, they expect its coal imports to continue rising to feed the country’s growing power demand, which is being helped by a prolonged weakness in the fuel’s price. Amid slumping demand and oversupply around the world, thermal coal prices are trading at a five-year low with little prospects of recovery in the near term.

Glencore, the Switzerland-based commodities trader, expects Indian imports of thermal and metallurgical coal to rise from a total of 180 million t next year to 300 million t by 2020 – possibly overtaking China as the world’s biggest buyer of the fuel.

A role for international firms?

In October, the Modi government confirmed its intention to allow international firms to develop and mine the country’s sizeable coal deposits as well as trade and distribute the fuel. It passed the Coal Mines (Special Provisions) Bill on 21 October 2014 to allow qualified foreign companies with subsidiaries or joint ventures to compete to develop, mine and trade coal in India “either for consumption, sale or any other purpose”.

The ordinance was hurriedly passed less than a month after the Supreme Court cancelled 214 of 218 blocks of some of the country’s largest coal deposits, which were held largely undeveloped by politically-connected companies and individuals. The blocks will be offered to the highest bidders in an open auction sometime next year.

Some reformists, however, will be disappointed, as CIL will be allowed to hold onto its lead role and concessions. CIL produced 462 million t in the last fiscal year to 31 March 2014: well below its target of 482 million t. Analysts doubt the company will achieve its latest production target of 507 million t in the current fiscal year to 31 March 2015.

The government said the new ordinance will allow for the cancelled licences and new blocks to be offered to new players in an open and competitive manner. Foreign firms will be invited to participate, although many are likely to adopt a “wait-and-see” attitude, given the unproved track record of the untested Modi government.

To ensure the success of the auction of the coal blocks, the government will be pressured to move quickly to free up coal prices and power tariffs to ensure that investors make a decent return on their capital.Without the certainty of a domestic price and tariff hike, international miners are unlikely to invest in India’s coal industry.

Furthermore, the government must increase security to protect coal mines from thefts, as well as attacks by local residents and environmental groups that have accused operators of harming India’s farmland and water supplies.

Written by Ng Weng Hoong. Edited by . The full report appears in the January 2015 issue of World Coal. Subscribers can view the full article by logging in and downloading the issue here

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