Coal news and updates

The importance of saving 46 coal blocks

How we will deal with them is going to influence the way local and foreign investors respond to upcoming auctions


The Supreme Court judgement on the allocation of coal blocks provides a suitable and timely platform for comprehensive reform of the coal sector, by bringing in private participation, investment, and market competition to the only segment of energy sector that has remained sheltered so far.

To achieve this, a new mining law is essential, and no compelling reasons exist today to deny a broader private participation in coal mining. Globally, state ownership in mining has declined since the 1990s, albeit replaced by a different form of resource nationalism.

Private miners have done a credible job of bringing in risk capital for exploration and developed efficient mines that meet the growing demand from emerging nations.

The Government has come out clearly in favour of auctions for new and de-allocated blocks, while the Court clarified that it is not a “requirement or a limitation”.

An auction is a rational choice, but in our situation, it will reflect the economics of end-use sectors rather than true value of the resource.

The largest producer, Coal India, enjoys, as the Competition Commission of India observed, “undisputed dominance in production and supply of non-coking coal”, and bidders will take a conservative position in an auction.

For the 46 blocks that are operating or are imminent, the way forward is more complicated. The view that impact of cancellation is “not so severe” severely underestimates it. Coal production from these blocks is barely 9 per cent of our national output, but to replace it, steam coal imports will rise by 45 per cent, making us the world’s second largest importer.

At that point, our imports will exceed entire Australia’s thermal coal exports, pushing up coal prices. Coal India may not be able to step up production to pick up the slack as it still runs short of commitments under the fuel supply agreement to existing customers.

Developing a new mine will take at least four to six years based on real life experience of current coal block holders. A strong government can help compress this timeline, but not by much. The suggestion of a ₹295-per-tonne levy taken from the CAG estimate to remove the presumptive gain appears at first sight workable. But its incidence is indiscriminate, as mine economics depends hugely on its geology — a ‘strip ratio’ (amount of waste material to be moved to get a certain amount of ore) of 4 instead of 2 will push up operating costs by 76 per cent — and the technology and fleet size it uses.

An auction with a first right of refusal to incumbent is another option mooted for the operating blocks. But this model fails to credit the large development risk early movers took to bring mines to production, especially in a challenging economic climate.

A quick analysis of enterprise value per tonne of reserve in developed markets shows that valuation improves 5 fold when a coal miner progresses from exploration to mine plan, and by 7 to 30 times when it gets to production.

In India, the valuation upswing will be smaller given end-use restrictions, but still reflects the real development risks, time and costs that must be factored in.

The above reasons make a compelling case to save the 46 blocks in their current form as most of the options suggested pose costs and uncertainty with no clear benefit.

The companies are not at fault in pursuing a government process, and to punish them would be unfair. Governments can impose rules to claw-back super profits, as many nations have done, and a prospective structure can be designed for these companies. The approach we take for these 46 blocks will shape how local and foreign investors respond to upcoming auctions.

Source: The Hindu BusinessLine