Few takers for India's coal mines with production apparently having peaked

Coal consumption to become even more import driven as domestic production plateaus

Do not read too much into the extension of the due date for receiving bids for auction of coal mines, announced by the coal ministry today. But give or take a few million tonnes, domestic coal production has seemingly reached its peak for the Indian economy. Signalling the changing times, state run Coal India Limited (CIL) has announced it will explore producing solar wafers. 

Annual production at CIL mines is rising at a crawl because what the industry needs is not available under Indian soil. There is no lack of effort from the coal ministry and state-run Coal India to hurry things up. They plan to open 22 coal mines in the next few years but of these, only one is a coking coal mine. While the second Covid-19 wave has forced the coal ministry to push back the deadlines for mine bidders to submit their papers, no one is therefore in a hurry to prospect for more coal.  

Remarkable change in coal prospects

India has been shifting back its annual target of reaching one billion tonnes of coal production. From FY20, the new target date is FY25. Even this seems a long haul from the 730.87 million tonnes reached in FY20. The compounded annual growth rate of domestic production is just 3.6 per cent. If one estimates from FY15, when the negative chatter around the sector had disappeared, the growth rate is even lower at 3.08 per cent. To reach a billion tonnes from here will need a CAGR of 8.18 per cent, which is just inconceivable. At the current rate, even if domestic coal production has to reach 800 million tonnes say, that will take India to FY24.

The sluggish pace means Indian financial institutions, including insurance companies, may be spared the difficult choice of having to say no to finance the expansion of coal mining projects. While the few companies that have won the 42 mining blocks have approached the banks for expansion of credit, it was on the cards that they shall do so. Foreign shareholders in Indian banks have already begun to push back against giving loans to coal projects. Black Rock and Norway’s Storebrand ASA, both of which hold less than one per cent stake in SBI, have raised their objections over the past year.

This is a remarkable change coming over the Indian energy landscape. Of the economy’s total present energy consumption, 55 per cent comes from coal. Of this, 83 per cent is from the coal mined by state-owned Coal India (CIL). This percentage is on course to slide big time, even with rising imports. No wonder CIL is toying with plans to enter solar wafer manufacturing. Company chairman Pramod Agarwal made these comments to Reuters early this year. 

The ease of imports is one of the key reasons why Indian domestic production is peaking so soon. Almost all the incremental coal demand is coming from steel, which only needs coking coal. India plans to triple its annual production of steel from the current 100 million tonnes. Demand for non-coking coal, led by the power sector has hardly risen. In six years from FY15 to FY21 the compounded annual growth rate for off take of domestic non-coking coal is just 3.06 per cent. 

This wasn't so even a decade ago. In FY11 the off-take by downstream industry of non-coking coal consistently exceeded the production capacity of the miners. But since then, off-take has tapered. It has been below the production capacity for the past six years, save for a brief spurt in one year, FY18. As a result, the opening stocks with CIL every year, is rising. 

The reasons, says a senior coal sector officer in the government, is because “coal imported by power plants designed on imported coal and high grade coal required cannot be fully substituted by domestic coal, which has limited reserves of high grade coal.”

Import driven consumption

The reasons why coal was economical to produce in India was its low price which compensated for the lower quality. Due to ‘drift origin”, Indian coal resources mostly consist of poor quality non-coking with even coking coal containing high inherent ash. While coal prices abroad trended around $50 a tonne, Indian prices averaged lower. This offered an incentive for the domestic industries using coal as a fuel to stick to the local output. 

Not any longer. Of late, even though global prices were handsomely high at $68.5 a tonne, when domestic prices were almost half, a special spot auction scheme started for the coal importers including the traders by CIL, has found few takers. The idea was to promote coal import substitution. CIL has offered about 32.7 MT coal under this window, of which less than 25 per cent, or 7.53 MT coal was booked by consumers including potential importers. Global prices since then has shot up to $108 but the economics of imports is not changing. India has even been importing 13 MT of coal a year from the US since FY18.  

To get importers to use more domestic coal, everything that could be tried has been attempted for a decade, but it has not sufficed. The latest is an inter ministerial committee. The panel encourages coal consumers in their respective sector to eliminate imports of coal. Short of threats, the committee has directed for the development of an import data system by the coal ministry to track large importers of coal. At one stage in 2013, CIL fought with the government to block power plants and other downstream users from getting more coal linkages, or committed supplies. In those years, CIL would commit to supply only a certain percentage of the coal the power plants needed. These linkages were usually set on the lower side at 60-80 per cent of the needs of the power plants. For the rest, the plants had to forage from the markets for coal. In a huge turnaround CIL, has now promised all thermal plants it would meet 100 per cent of their annual contracted quantity of the normative requirement. 

CIL has rapidly expanded use of the latest technology to mine coal. Most of the company’s under ground mines have become totally automated while the introduction of surface miners in open-cast mines has raised their operational efficiency massively. Yet it is not expanding coal production as the company is also shutting down mines whose reserves do that do not meet the grade. In the past three years it has closed 54 mines. Another 27 will be closed by FY24. Those are large numbers, even after accounting for the 22 it plans to open. CIL now operates 352 mines (as on 1st April, 2020) of which 158 are underground, 174 opencast and 20 mixed mines. 

The new mines to commence production in the private and public sector companies will not change the math drastically. They already produce 64.7 million tonnes and there is little upside expected from there.

Early this year, home minister Amit Shah said the coal sector would play a “very important role” in achieving the target of a five trillion dollar economy by 2022. Both of these targets seem far and away now.