Govt looking to end CIL monopoly but policy may give it pricing advantage

Mining policy proposes higher price for coal sold by private firms; move may dampen pvt investment

Even as the Centre has finally made the move to end Coal India Limited’s (CIL's) virtual monopoly in the market by allowing commercial private mining, it has proposed a higher price of coal to be sold by private mining companies. Analysts feel it might dampen private investment in this sector.

According to the draft policy, private miners will have to report the estimated revenue on the basis of monthly production return multiplied by actual selling price, or 1.2 times the ore price of CIL of the applicable grade, whichever is higher. In the event that CIL's price undergoes a change during the month, the calculation will be done on a pro rata basis.

Sector analysts said it is implied that the private miners will have to sell coal at a price which is 20 per cent higher than CIL’s run-of-mine price of equivalent grade. However, the government hasn’t capped the upper selling price.

An analyst with Motial Oswal said that this clause implies that CIL will continue to offer the minimum price and the price of similar grade of coal mined by private companies will be 20 per cent higher.

“Thus, CIL will be in a position to offer the lowest price compared to private miners and naturally have a competitive advantage,” the analyst said, adding that so far, there has been lukewarm interest from private mining companies over entering the coal mining vertical in India.

Another key contention, according to analysts and industry officials, is the concern over the Mining Plan and the prevalent economic situation.

In the draft policy, which the Centre has come up with asking for industry inputs, it has stated that while the mining company shall be allowed to manage the production quantity according to market conditions, a fall not less than 50 per cent will be allowed in case the demand for coal drops. Also, the miner, in any five-year block, will have to mine out at least 70 per cent of the production under the Mining Plan.

On the other hand, the draft policy has also sought to safeguard the state’s royalty income. While clarifying the revenue sharing model between the company and the state, the draft policy has stated that at the end of every financial year, according to the audited accounts, payments will be made (to the state) and the adjustments may spill over into the next financial year.

Kameswara Rao, leader of energy, mining and utilities at PwC India, is of the view that while the minimum mining volume clause – 70 per cent in any five-year block – avoids idling of national resources, it might also dampen private sector response. 

“The volume commitment clause is hard to deal with during periods of economic downturn, when a state-owned dominant player may continue to maintain production,” he said, adding that any mining company, during the super-cycle, provisions a certain proportion of its earning for the lean years when its revenues may not be enough to cover its fixed costs. 

“In the current draft model, the companies will make deep losses during years when demand is low. On the other hand, the government gets a far smaller share of upside during periods of high demand. Ideally, commercial mining policy should not be linked to production, and instead, seek a share of profits based on normative costs. This may be harder to calculate but is fair to both parties,” Rao said. 

The next concern is regarding the economy of scale, which, according to analysts, will dampen interest from private companies. Restarting private commercial mining after a gap of 44 years, the government is offering two-three mines having peak rated capacity of around 30 million tonnes (mt) per annum which has coal reserves of G11-G13 grade. 

Debasish Mishra, partner at Deloitte Touché Tohmatsu India, opined that bidders will look for mines with higher reserves to employ latest mining technology to achieve scale.

However, the government has clarified that depending on the outcome, the future course of action and policies related to commercial mining can be streamlined.

Mishra, along with Rao, is also of the view that private investment in commercial mining would face challenges like land acquisition, resettlement and rehabilitation (R&R), environment and forest clearances and others.

“R&R is a big challenge. While state-owned companies have a generous R&R policy that offers compensation and jobs to the affected population, private companies might find it difficult to match," Mishra said.

Rao added that the final outcome and success of private commercial mining depends a lot on the cooperation from the respective state governments where the mines are located.

A Kolkata-based company, which was initially interested in the commercial mining of coal, has now left the plan midway.

“The regulatory regime will continue and processes and clearances will take time,” a senior executive of the above-mentioned company said.