coal insights, april 2015

4 Coal Insights, April 2015

COnTEnTs

10 Will states demand mining payments from CIL too?

12 Steam coal offers volatile in April 14 Coking coal offers continue downtrend in

April 19 India’s coal production crosses 540 mt till

February 21 India’s cement output down by 5% in

February m-o-m 24 CMA seeks import duty levy for level playing

field 25 Railways can ride on cement to reach freight

targets: CMA 26 Sponge iron: Pipe dream or reality? 31 India’s power generation crosses trillion mark

in 2014-15 33 India in 2050: Welcome to the Land of Coal 51 Coal India pads up to bat poaching 54 E-auction of coal blocks: A laudable

procedure 55 Coal’s share in power generation may drop

9% by 2025 63 Corporate updates 66 US power sector coal consumption to fall in

2015 68 4 change agents MET to share their stories 69 India’s coal imports, Adani’s coal project

create buzz 72 Krishnapatnam Port eyes 50 mt coal imports

by FY16 73 Railways coal handling up 7% in 2014-15 75 Thermal coal handling by major ports up

20.4% in FY15 76 Annexure 77 Supply data 78 E-auction data 80 Port data

47 | INtERvIEwtechnically all 5 companies are still in ICvLThe Mozambique block holds promise for Indian steelmakers, says N C Jha, MD & CEO, ICVL.

38 | INtERvIEw“Ask the industry, not the government, about aggressive bids” Coal secretary Anil Swarup asserts that coal will cease to be a problem within a few years.

70 | LogIStICSgovt, IwAI plan to develop 101 waterways across IndiaA separate study will be conducted for assessing coal carrying capacity of waterways.

16 | FEAtUREwill India’s coal imports surge to 400 mt by FY20?Import by power sector may go up to 230 mt, while coking coal imports will reach 60 mt.

6 | CovER StoRYwill new captive block owners actually mine coal?Winner may resume mining only after international prices firm up, feel industry insiders.


Will new captive block owners actually mine coal?

COvER sTORy

Winners may just import coal at present and resume mining from the captive blocks only after international prices firm up to the extent that these

will be higher than the cost of the fuel extracted from their own mines…

Coal Insights, April 2015 7

COvER sTORy

is around $40 per ton, they are out-pricing themselves,” said a source.

“You will obviously do benchmarking on like-to-like basis. It is basically a right to mine coal, which is not the best in the world but, at best, medium to low grade,” said the source.

“Overseas, if someone wants a running mine with this type of coal, he will not have to pay more than $6-8 per ton. At present, the cost of rights to mine coal from the mine which was acquired by ICVL- Riversdale from Rio Tinto would be in the range of some cents per ton … not even dollars!” experts said.

“Even if you compare the international deals with bid prices or benchmark these with the bid prices, then, on an average, these will be ten times higher. So, how can these be worthwhile deals?” they asked.

The experts are of the opinion that there is a strong possibility that imported coal will be available at lower than the price at which captive coal can be mined from the blocks

Coal Insights Bureau

A section of industry doubts that post the aggressive bidding of operational and soon-to-be operational coal

blocks, a number of winners may not immediately mine the coal and even consider forfeiting their bank guarantees and, instead, buy imported coal because of the latter’s lower costs.

These doubting Thomases feel so because winners have ended up paying huge amounts to get the rights to mine coal and ensure raw material security. In fact, the amounts they have paid are almost 5-10 times higher than $5-8 per ton that is generally charged in other countries.

The aggressive bidding in the first two rounds of the e-auction of captive mines might have fetched over `335,000 crore to various state governments but experts in the industry are sceptical whether the winners will ultimately mine the coal after paying the high price to win the rights to mine that very coal.

According to information available with ICMW, most non-power and, to some extent, power sector companies, have bid in the range of `126- `4,000 per ton, just to get the rights to mine the coal.

“These winners will have to bear additional costs of around `1,000 per ton in the form of various taxes, plus there will be the cost of mining and transportation of coal from mines to their plants which will take the total cost to around `4,500-5,000 per ton,” a former chairman of Coal India Ltd (CIL) said.

According to other experts, the benchmark price while bidding for the mines should have been that of imported coal because that is the alternate source since most consumers don’t get the fuel from Coal India (CIL).

“Those who don’t mine coal have to depend on the imported variety. And imported coal prices are ruling soft so the CIF or landed cost of lower-to-medium-to-better quality coal would be $40-$70 per ton, which, in Indian currency, means `2,500-`4,500 per ton,” sources said.

“The average bid price quoted would be not less than `2,500 per ton. If the right to mine coal is available at `2,500 per ton, then after mining and bringing the coal to the plant, the cost will go up to anywhere between `4,500-`5,000 per ton, depending on the location,” said the experts.

“Can such a price be just absorbed? It is a tall order! And where are the savings?” asked the ex-chairman of CIL.

“I don’t know the margins being enjoyed by the players mining coal from the operational blocks. But the point is, even with reference to imported coal, this `2,500 per ton is the cost they will be paying over and above this. Plus, they will have to pay 14% royalty, undertake capital expenditure, operational expenditure, mine the coal etc,” he said.

Now the question is whether they will actually mine the coal or just import the fuel but keep the mine as of now and do the mining only after international prices firm up to the extent that these will be higher than the cost of coal that will come from the captive mines?

“If you look at the rights of mining captive coal, what is the price for that globally? Even for the best grade of coal, I don’t think prices are more than $5-8 per ton. Against that, if somebody is paying `2,500 per ton, which

Absorbing cost of mining may be difficultAggressive bidding by many companies to ensure supplies in the recently-held coal auctions might put some of them in trouble as they might find it difficult to absorb the mining cost and additional bid price that they have quoted, a senior official from a leading steel company said.

“However, some companies that have not tied up their PPAs may try and pass on the cost through the fixed cost route. But with the regulator noticing this, it will not be easy to have this as a pass-through,” the official said.

According to the official, there might have been aggressive bidding probably because some companies might be betting on higher merchant power sales, which is allowed up to the extent of 15 percent of the total generation of power.

He, however, felt that some companies have bid high numbers to secure coal supplies as they neither had coal blocks nor linkages and so the idea perhaps has been to cut losses without a steady fuel source.

“Power tariff is supposed to go down, but who will fund these coal blocks with such a biz model? The banks have to be brave to take a big exposure to this sector especially with many of them suffering from NPAs,” the official said.

“Cheaper power is ok… but even the cement and steel companies have put in outlandish prices and I am not sure of their logic unless they are betting big on a major revival of coal prices which looks unlikely in the medium term at least,” the official said.

He pointed out that both the US and China are trying to cut down on coal consumption and focusing more on gas (shale gas). If China succeeds in shale gas, it will impact world coal prices significantly downwards.

The official, however, felt that the government is looking at auctions as a transparent method of allocating all its natural resources and this is a good move in the long term as markets mature and develop a better understanding of market dynamics and auction implications.


Excerpts:

You must be a happy man today that the coal block auctions have become a success and production is looking up.

When I took over as Secretary Coal, there were more people who were sympathising with me rather than congratulating me. A former Coal India (CIL) Chairman actually reflected that we are in such a situation where, no matter whether we do well or not do well, we are always in trouble.

Let me tell you that it has been a tough period. I did not know much about the coal sector when I joined the ministry. Then, as I started understanding this sector, I realised how vast is the scope and the dimension of challenges in hand.

Today, I look it this way – the root problem in the coal sector is deficiency in coal production. If we could understand why this deficiency was there and how to take care of this deficiency, I think most of the problems will get solved.

“Ask industry,not government,

about aggressive bids”

When he took over as Secretary, Ministry of Coal, people were more sympathetic than cheering. And he, without much insight into the coal sector, was not exactly jubilant. But

four-and-a-half-months on, Anil Swarup instils a sense of urgency and accomplishment across the board. Close on the heels of the stupendous success of the first round of e-auction of coal blocks, Swarup met the coal consuming industry in Kolkata. What followed was a no holds barred tête-à-tête between the two parties that covered all aspects – starting from the justification of optimistic projections for coal output to the possible adverse impact of the aggressive bids. Coal Insights stood witness to the proceedings.

How did you plan to address this challenge? How confident are you about achieving the optimistic projections of 1 billion tons made by the ministry?

We tried to understand as to what would be the requirement of coal, say by 2020, assuming a GDP growth rate of about 8 percent per annum. I believe the growth rate may be more, given the initiatives being taken by the government. However, even for that level, we found there will be requirement of about 1.5 billion tons of coal

by 2020. So, our understanding was that we have to make arrangement for this 1.5 billion tons.

Initially, no one believed that this target could be achieved. Some people said you don’t understand what you are talking…how you are going to arrange for 1.5 billion tons?

So, what we planned, and some of it is being demonstrated, is that we should target to get a billion tons of coal from Coal India and the remaining 500 million tons (mt) from non-Coal India sources. When I

InTERvIEw


Excerpts:

Let us start from the domestic coal industry which is seeing a lot of actions these days. The e-auctions of blocks and decision on commercial mining have created ripples in the industry. The major beneficiary of these has been the states. Do you think there is a conscious decision to involve the states more into the coal production and distribution?State governments feel that they do not have any role, say, or right on how coal should be distributed and to whom, though in the linkage committee there is a member from the state government. But they are always under pressure by the industry within the state to give them coal, water, land, electricity and whatever facility is required.

Thus, they say, if they do not have any say in allocating coal then what is the advantage to the state? We have also been telling the government at the Centre to allow the states to be involved in deciding coal linkages or coal allocations. But the

central government’s view is that coal is a national property and does not occur in every state, and if the state in which coal occurs, is allowed this type of dispensation, what will happen to the other states?

Then states rich in other products or commodities may say they should have the rights to distribute the same products within the states. So these issues were debated upon for a long time and I was also of the view that this type of dispensation cannot be allowed to the states.

The states may be allowed to mine some amount of coal themselves and as Coal India is distributing throughout the nation, the states should distribute the coal within the state.

But the recent measures by Centre seem to address this issue.

Fine, but the base for that policy was started in 2011 when I held a meeting with the then coal secretary who asked me about the linkages. I had said the government has

allocated many coal blocks for commercial mining by the state governments, but why is the NCDP not applicable to them? Why is only Coal India supposed to supply coal through the FSA route and the state governments are not asked to follow the same? In that case, the NCDP is defective? It should be applicable to all coal producers, who are allowed to produce themselves in India and FSAs should be made mandatory for all.

The coal secretary had then said that this was a very valid point and asked the joint secretary that there should be an enactment, which eventually came about in December 2012 after my retirement. It took them almost a year to decide the formulation of this policy. It did not come by way of an Act, but through a government circular.

Later on, all the coal blocks got cancelled. This NCDP which is applicable to Coal India and SCCL should also be extended to commercial miners and they should be allowed to mine coal and sell.

As for the aggressive bidding in the auctions, the money will go to the state governments. Don’t you think, going forward, there could be a demand from the states that, not just private companies, but Coal India should also pay this cost of right to mine coal?

See this right to mine is mainly for the new blocks and not applicable to the existing mines of Coal India, where the states may demand so. But because coal is under the purview of the central government, even if the state governments demand so, the central government may not agree because it has to meet the demand of the entire nation.

State governments perhaps will not raise this issue, because they are getting blocks for commercial mining free of cost, without having to bid. If they raise the demand, then the issue could be raised as to why a coal block should be allotted through the state dispensation route?

If everything is put to bid, then they will have a right to sell coal and for that the nationalisation Act has to be amended. The right to sell coal is not being given to any private company. It will only be with

Technically, all 5 companies are still in ICVL

After prolonged hibernation, International Coal Ventures Private Limited (ICVL) is finally into some action.

The joint venture of five central public sector units (CPSUs) has bought mines in Mozambique and is sending coal shipments to the Indian shores. However, the constituents of the special purpose vehicle (SPV), which was formed by the

government to pursue acquisition of coal blocks abroad, do not show much keenness to be party to its success. At such a juncture, N C Jha, Managing Director & CEO, ICVL and former Coal India chairman, shares his thoughts over the future of the Mozambique venture. He also speaks his mind about various domestic issues, including e-auction of blocks, coal quality, the New Coal Distribution Policy (NCDP) and many more. And, of course, he asserts that the members of ICVL still continue to be a part of it, at least technically. Rakesh Dubey of Coal Insights gives a patient hearing.

InTERvIEw


InTERvIEw

What is new at Coal India on the HR front?

On the HR front, we effected a performance management system since last year. We made it a computerised, balanced score card-based performance system, which has now stabilised. This year, ie, 2015-16 onwards, we are going to implement it for all executives, up to the GM level. Earlier, it was up to E-6 or senior managers. Now chief managers and general managers will also be covered under this programme. Apart from board-level personnel, all others will be covered.

The advantage is that you can set the target at the start of the year and monitor and see whether it is achieved or not.

We have a half-yearly review.As for recruitments, we have already

done so many. Now we are going to advertise for management trainees and doctors.

We are also going to start working on another proposal which we have already submitted. Overall, other than officers, the

mining sardars and surveyors, we are not getting sufficient number of candidates to fill up the statutory posts. We did an analysis over the last two recruitment cycles and found that we are unable to fill up vacancies reserved for scheduled castes (SCs) and scheduled tribes (STs). The candidates are not available. So we thought we should now start a training scheme. We will take in some candidates through open advertisement. We will train them at our facilities and have a training centre and hostel, etc. A minimum of 3 days’ training is required. Finally, we will provide them theoretical knowledge, make them appear for a test and if they pass, we will recruit them to fill up the vacancies.

Will this training facility be only for SCs and STs?

Yes, because we are facing problems only with those. We do get applications for general category candidates. Thus, we are starting the training programme.

Coal India Limited is eager to shed its stuffy image and emerge as a new-age coal mining company. It is on the

cusp of revamping its HR policy which had been drafted in the 1980s. Plans are afoot to improve the work and living conditions of its employees and an action plan has been evolved towards implementing the same. An effective training programme is being organised for its management trainees to

give them a well-rounded view of not only the coal sector but other functional aspects like finance, labour laws and mine laws, environmental aspects, forest management concerns etc. R Mohan Das, Coal India Limited’s Director (Personnel & IR), tells Rakesh Dubey of Coal Insights that the new coal allocations may unleash a scenario where the private sector may poach but the mining behemoth is not too perturbed

Coal India pads up to bat poaching

How many candidates can be accommodated?

We can easily accommodate 800-1,000 candidates and this number will increase.

Our idea is to start from July-August this year.

We are trying to identify a suitable place. We have identified a location in WCL at Chhindwara which has an existing complex which is not fully utilised, complete with a hostel facility etc. Plus, other subsidiaries also have some space where we can arrange such programmes.

Our idea is to have a centralised facility; however if any subsidiary wants to do it independently, it can do so as well.

Under the current programme, it will be held at some subsidiary but CIL will do the overall monitoring.

What are the key HR challenges being faced by the mining sector?

One challenge is that our seniors are retiring, juniors are coming in. However, we do not have sufficient number of personnel at the middle level. The key is to impart training and knowledge to the juniors to fill the gap. It is a continuous process.

So, for now, we are re-developing our training programme for management trainees. Earlier, we had a curriculum but the training material was not up to the desired level. So now we are re-doing it. I held discussions with the engineers of public enterprises as well as officials at the Administrative Staff College of India (ASCI), IIM Kozhikode and ISM Ranchi. We want to hold an in-depth course of 1.5-2 months. All the management trainees that are recruited will need to undergo this in-depth training. See, they come fresh from colleges as engineering graduates. We want them to know about the coal sector etc. Then there are functional inputs such as basics of finance, labour laws, mine laws, environmental aspects, forest management concerns – all these aspects which they will require in their day-to-day working. And the training programme will focus on such aspects.

What about the management trainees who were recruited earlier?

We will immediately put the management trainees (MTs) through the training


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coal insights, april 2015

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