Coal news and updates

As Narendra Modi, India’s new prime minister, grapples with slowing growth, weak output and rising inflation, he will pay particular attention to one company whose performance has a bearing on all those issues: Coal India, the public sector behemoth that mines 80 per cent of the country’s coal.

 

That in itself presents a big challenge. For Coal India is not performing well. It has missed production targets in five of the last eight months and output has grown at less than 2 per cent annually over the past four years.

 

Nevertheless, Coal India’s shares are riding high. And this week, regulators ordered the government to cut its stake in all state owned enterprises to 75 per cent or less. The government owns 90 per cent of Coal India; selling a 15 per cent state could net it about $6bn.

 

Last year, the government estimated that imports of coal would reach 185m tonnes in the 2017 fiscal year, a huge amount for a country with the fifth largest reserves in the world.

 

Yet Coal India’s shares are up 38 per cent in the past six months while the wider market has gained 21 per cent, reflecting hopes that Modi will announce a slew of reforms.

 

“The volumes which are coming up are because of small improvements in their efficiency but if we see structural reforms… we can see significant improvement in valuations,” says Kamlesh Bagmar of Prabhudas Lilladher, a Mumbai brokerage.

 

One problem facing Coal India is land acquisition. Prabhudas Lilladher reckons it needs to acquire between 10,000 and 12,000 hectares of land a year to meet its target of adding 50m metric tonnes a year to its output – a stretch, given that the group has only managed to acquire 4,000 hectares in the past two years.

 

Last year’s Land Acquisition Act threatens to make things yet more difficult for large corporations. Changing the law is one option but analysts at Standard Chartered suggest Modi may choose to allow state land legislation, which works in favour of big business, to prevail over national legislation.

 

Another problem is the amount of time it takes to get clearances for new projects. Modi’s Bharatiya Janata Party promised during the election campaign to create a “single-window” system to simplify the process.

 

A third external problem facing the sector is transportation. Industry analysts estimate that Coal India could increase its production by 220m tonnes annually if three crucial railway lines were developed fully. “They can increase production – production isn’t that big an issue,” Bagmar adds.

 

Many expect the necessary works to be commissioned in the next few years. The government’s recent moves to raise rail fares and freight rates suggests the era of populism and weak investment may be over.

 

But Coal India, with its bloated workforce and low productivity, itself needs reforms. Any government-controlled group tends to suffer under the weight of rules on procurement and added tiers of decision making but Coal India is, by any standards, particularly bad.

 

“Streamlining the company will reduce decision making time and will help to streamline the policies followed throughout the company,” says Pukhraj Sethiya at PwC India.

 

The current set-up, involving a holding company and seven coal producing subsidiaries (plus a consultancy arm), is unwieldy, prompting calls for it to be restructured.

 

Getting the private sector involved could be one answer. This is happening elsewhere in the sector through “captive” coal blocks, where companies can mine coal for a specific end use. But only a small fraction of the mines allocated in this way are currently in operation – mostly because private players face the same external hurdles as Coal India.

 

Public private partnerships are one option suggested by the finance ministry last year. But PPPs with fixed rates of return seem unlikely to work well in long-term mining projects, where costs and market prices can change dramatically. And where Coal India has contracted work out to private operators, problems have arisen over a mismatch between coal prices and costs, especially in the initial phases of mining projects.

 

And there are further complications.

 

The relationship between environmental NGOs and the new administration looks fraught after an Intelligence Bureau report leaked to the press suggested activists were being used by foreign powers to influence policy. As Modi takes office, having pledged to revive the economy by cutting red tape and speeding up decision-making, campaign groups are suspicious of what this means for the environment and poor land owners.

 

In its most recent report on Coal India, Greenpeace quotes a 2012 report from a Coal India research subsidiary which put extractable reserves at some 16 per cent less than estimated in 2010, when the company launched an IPO, at 18.2bn metric tonnes.

 

If the government obeys the regulator and sells down its stake in Coal India, investors will be keen to gauge the actual extractable reserves – and presumably planners will want those numbers, too.

 

 

Source: ft.com