India’s Unwavering Bond with Coal
India’s move to further liberalize its coal sector by throwing it open to companies with little experience in the industry sends a strong signal that the country’s dependence on the energy resource will stay robust in coming years and its share won’t fall quickly in the energy basket despite the push towards cleaner fuels.
But analysts and traders said that for non-coal players to jump into the sector, New Delhi needs to ensure investors of a long-term strong support through policy incentives in order to convince them to invest.
“Coal-consuming sectors, such as the ceramic and brick sectors, are unlikely to purchase coal blocks unless they are able to get a very cheap price, due to the thin operating margins in these sectors,” said Matthew Boyle, senior coal analyst at S&P Global Platts Analytics.
India’s cabinet in January approved the Mineral Laws (Amendment) Ordinance 2020, allowing coal mining by any company and does away with the captive end-use criteria. Industry sources say the move will help provide a fillip for auctioning of coal blocks for commercial sale along with attracting investments from Indian and global companies.
While India previously allowed for 100% foreign direct investments under the automatic route for coal mining for captive consumption by power projects, as well as iron and steel and cement units, the latest policy decision allows auctioning of mines to all sectors.
Industry officials see it as a major step toward realizing the government’s target to completely stop coal imports by power plants by 2024 amid expectations that this would result in higher coal output.
After the country’s Supreme Court canceled 214 coal blocks in 2014, only 29 have been auctioned due to end-user restrictions.
“India is expected to continue struggling to increase production and without a major acceleration in production from captive coal blocks, we believe that it is unlikely that output will rise materially,” Boyle said.
According to Platts Analytics, Indian coal production totaled 701 million mt in 2019, about 3.6% lower than the output in 2018. Indian coal production was hit by heavy rains during an extended monsoon season in 2019.
“We reiterate our domestic coal production forecast of 735 million mt for 2020, which is only 26 million mt more than our forecast for 2019,” Boyle said.
RELAXING RULES FURTHER
New Delhi’s decision to allow non-coal companies to invest in the sector comes three months after the country allowed 100 percent foreign direct investment in coal mining, a move that will not only aid more competition in a sector dominated by the government for decades, it could potentially save billions of dollars in foreign exchange outflows amid the country’s dependence on imports, according to analysts and senior officials.
The average calorific value of coal that India produces is about 3,600 kcal/kg GAR and the ash content can go as high as 35%.
Analysts and traders said concerns about coal quality remain and could be a deterrent for new private companies to invest in these mines. Setting up washeries to upgrade the quality of coal will be key to tap not only domestic power plants but also the export markets as and when opportunities arise.