Private commercial coal miners to face headwinds from India’s accelerated transition towards renewables and Coal India’s aspirational production targets; however, import substitution remains a potential opportunity: ICRA
- Coal India Limited likely to retain its dominant market share in the long-term FSA[†] segmenton the back of a competitive cost structure
- Apart from import substitution, supply of washed coal to non-regulated users, presence in the e-auction market, and exports remain other potential opportunities for commercial miners
The opening up of the coal sector for private commercial mining, for which the first list of mines have been published by the Central Government on June 18, 2020, is an important reform in ensuring India’s energy security. However, its rollout has been at a time when economic outlook remains uncertain amid the Covid-19 pandemic, leading to weak investor sentiment. In addition,there is a structural shift in India’s energy mix towards renewables.As per ICRA’s latest report on the coal mining sector, the domestic coal demand is estimated to increase at a modest compounded annual growth rate (CAGR) of 2.9%[‡] between FY2021 and FY2027. This is much lower than the CAGR of 5.2% registered between FY2013 and FY2020. Given Coal India Limited’s ambitious target to reach 1 billion tonne coal production by FY2024, private commercial miners would face stiff competition in gaining a foothold in the domestic market.
Elaborating further, Mr. Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said, “In a market, where an overwhelming majority of the domestic supply is controlled by Coal India and Singareni Collieries, affordability, dependability and consistency in coal quality would remain critical drivers that would determine if the existing coal customers decide to partly shift their sourcing to private commercial coal miners.Experienced players, who have the knowhow of efficiently operating a coal mining business,stand a better chance inmaking a dent in the market share of the existing players. Over the long-term, we believe that coal consumers are likely to benefit from increased competition in the domestic coal mining industry.”
Around 94-95% of Coal India’s overall production comes from opencast mines, having attractive stripping ratios, which have an inherent cost advantage over their peers.Consequently, the operating cost[§] for Coal India’s opencast mines reportedly stood at a competitive Rs. 833 per metric tonne (MT)[**] in FY2019.Moreover, out of Coal India’s 582 million tonne (mt) of despatches in FY2020, around 89% has been supplied under long-term fuel supply agreements (FSAs) where the realisations remain very competitive. Given this cost competitiveness, as well as the arrangements already available to deliver coal to clients’ plants, threats to any loss in Coal India’s market share in the FSA segment remains low in ICRA’s view;consequently the company would continue to dominate the sector in the foreseeable future. However, the geology of the mines belonging to The Singareni Collieries Company Limited remains less favourable, resulting in their operating costs being more than double that of Coal India. Consequently, vulnerability from increased competition remains much higher for Singareni Collieries, whose notified coal prices have an average premium of 40% – 125% over Coal India’s notified prices for various grades of coal.
In FY2020, India imported 243 mt of coal from the seaborne market which entailed a hefty import bill of approximately US$ 21 billion. Out of this, around 52 mt was coking coal imports, which would be difficult to replace, given its limited domestic reserves. The balance 191 mt of imports was contributed by thermal coal, of which India has abundant reserves.
In this regard, Mr. Roy added,“India’s low-grade thermal coal imports stood at an estimated 110 mt in FY2020, and its import substitution with domestic coal remains a potential opportunity for private commercial miners. For the balance 75-80 mt of high-grade thermal coal imports, options to partly substitute such imports by supplying washed coal to the non-regulated sector also remains a potential area of growth for private commercial miners. Apart from import substitution, increasing market presence in the seaborne export market, and faster adoption of coal-gasification technologies may be other potential avenues of growth for private commercial coal miners.”
The biggest challenge in executing a large greenfield coal mining project is the risk of delay due to land acquisition hurdles and securing regulatory clearances. For these 41 mines on offer, around 35% of the land falls in forest areas. Therefore, pro-activeness of the Central and the state governments to ensure time-bound clearances would remain critical towards achieving self-sufficiency in India’s thermal coal availability. The State of Odisha would play a key role, with most of the larger blocks on offer being concentrated in this state. Total nine coal blocks from Odisha have a cumulative peak capacity of 124 mtpa, accounting for around 55% of the total capacity and around 63% of the cumulative geological reserves of these 41 blocks.