Coal And Lignite Sector In India Economics Essay
Domestic coal production is improbable to run into expected demand growing over the following five old ages. PSU companies, who account for four-fifths of the state ‘s coal production, are happening it hard to speed up production growing. Environment clearance and rehabilitation and relocation ( R & A ; R ) issues are making serious barriers for private companies as good.
Hence, the demand-supply spread has to be met by raising imports. Asimports cost about thrice every bit much as domestic coal, economic sciences of a figure of undertakings based on domestic monetary values would hold to be reworked. In a pessimistic scenario, commencement agendas of planned public-service corporations would be delayed. In the more immediate term, other big users of coal would confront important addition in coal costs.Coal India is fighting to run into production marks: Over the last four old ages, Coal India Ltd ( CIL ) has slipped from overachieving production marks to losing them.
Against 5.2 % production CAGR achieved over FY03-07, mark of 7.5 % CAGR in production has been set for FY08-12. The growing in the last five old ages was chiefly contributed by bing mines and on-going undertakings. Traveling frontward, about the full incremental capacity has to be contributed by new undertakings. This increases hazard of deficit in marks. Get downing production in a new undertaking is significantly more hard, owing to holds associated with a overplus of clearances required and bristly R & A ; R issues.Performance of confined units does non animate assurance: There has been a crisp acceleration in confined coal block awards over the last three old ages, raising outlooks of crisp additions in coal production.
Past history and our interactions with industry beginnings suggest that there could be important letdowns. Of the 39 confined coal blocks allocated during FY93-03, merely 14 had commenced operations by end-FY08. Land acquisition and forest clearance have proved to be intractable jobs in most cases.Large coal users could confront deficits: In the event of deficit in domestic production, supplies to big non-utility coal consumers like metals and cement companies would be cut before the public-service corporations and SMEs are affected. The authorities programs to take down the threshold that triggers punishments for non-performance of supply contracts for such participants from 90 % of the assured measure to 60 % . Replacement of inexpensive linkage coal with dearly-won imports would hold a important impact on borders of these companies. For illustration, cement companies could witness 5.2 % lessening in EBITDA per metric ton if 15 % of domestic linkage coal has to be replaced by imported coal.
Coal demand should increase by 60 % over FY07-12Utilities, the largest coal consumers in India, accounted for 71 % of the state ‘s coal demand in FY08. As per authorities programs, India is likely to add 78.7GW power capacity during the 11th Plan period ( FY08-12 ) and undertakings based on domestic coal history for 49.7GW of this proposed capacity. Equipment telling for the planned capacities is well complete, with 45 months still left in the current Five-Year Plan period ( FY08 12 ) . This has raised outlooks that there should be a quantum betterment in achievement vis-a-vis marks as compared to the last Plan period, when less than 50 % of the targeted coevals capacity add-on was attained.
Based on our computations, the proposed addition in power coevals capacity would necessitate an extra 216m metric tons of coal supply per twelvemonth.Coal ingestion in confined power units has registered a CAGR of 10.6 % during the tenth Plan period ( FY03-07 ) . Government plans continue to put accent on confined power capacity add-on.
Planing Commission estimations that coal ingestion in confined power workss will turn at an annualised rate of 14 % over FY08-12.Our estimation is more modest, a CAGR of 10.7 % over the period, in line with our outlook of public-service corporations ‘ coal ingestion. This would interpret into incremental demand of 19.2m metric tons by FY12, stand foring ~4,000MW capacity add-on during the period, as compared to coal-based confined power capacity of 9,081MW as at terminal FY06.
The steel sector ‘s entire coal demand works out to 68.5m tonnes/year by FY12, based on hot-metal production program of 70.3m metric tons by FY12 as arrived at assorted policy paperss. That translates to incremental demand of 33.5m metric tons of coal by FY12. A big portion of the coal demand would be met through imports.The cement sector is another of import consumer of coal.
As per Plan paperss, one-year cement production during the 11th Plan period should increase 61 % , from 156m tones during FY07 to 251m tones during FY12. Driven by significant technological betterments, mean specific ingestion of coal in cement workss has decreased from 0.154 in FY02 to 0.127 in FY07. We estimate coal demand for incremental cement production at 11.9m metric tons by FY12.
Based on 7.5 % GDP growing and coal snap of 0.6 to GDP, we estimate other coal- devouring industries to drive incremental demand of 20.2m metric tons by FY12 as compared to 102.6m metric tons consumed in FY07.
Our bottom-up analysis for major consumers and top-down estimation for smaller consumers, gives an estimation of 9.6 % CAGR in demand for thermic coal and 9.8 % CAGR in overall coal and coke demand.Our demand estimations are higher than those in Plan paperss but are in line with demand indicated by the user industries The Planning Commission Working Committee on Coal ( PCWG ) for the 11th Plan period has estimated that one-year thermic coal demand will increase to 662.
6m metric tons by the terminal of the Plan period, against our estimations of 725.8m metric tons. Aggregate demand computed from demand assessed by user industries-794.2m tonnes-is in line with our estimation. Our estimations differ from Plan estimates chiefly with regard to demand from public-service corporations ; PCWG ‘s demand estimates factor in past underachievement of marks by the power sector, whereas ours do non.Though our estimation of entire incremental thermic coal demand by FY12 is merely 26.3m metric tons higher than PCWG ‘s estimation, our FY12 demand estimation is 63.
2m metric tons higher, as Planning Commission paperss were based on a lower estimation of demand for FY07 ( 460m metric tons, against existent demand of 496.9m metric tons ) .Domestic coal supply improbable to run into coal demand Based on demand projections made by the Planning Commission and estimations on beginning of new undertakings, the Planning Commission expects domestic coal production to increase from 430.8m metric tons in FY07 to 680m metric tons in FY12.When compared to our demand estimations, the PCWG ‘s projection of supplies by FY12 implies a deficit of 114.
2m metric tons, which would hold to be met through imports. Metallurgical coking coal would lend 0.9m metric tons of the imports, with non- metallurgical coal imports estimated at 73.4m metric tons. This is at discrepancy to the Planning Commission paperss, which suggest that the demand-supply spread for non-coking coal would be a comparatively modest 10.3m metric tons.Contribution of imports to increase over FY08-12We estimate part of imports in run intoing non-coking coal demand will increase from 5.
2 % in FY07 to 10.1 % by FY12.Actual deficit could be higher than estimatedThe existent demand-supply spread could be wider than our estimations, as we are non sanguine about domestic production projections arrived at in the Plan paperss. Government projections rely on:important acceleration in production growing from CIL ( lending about four-fifths of domestic production )two ) jumpstart in production from confined minesWe have concerns on both premises as detailed in following subdivisions.Coal India is fighting to run into production marksThe tenth Plan period ab initio set a production mark of 405m metric tons for the terminal twelvemonth of the tenth Plan period ( FY07 ) .
This mark was later revised to 432.5m metric tons as operational efficiency additions in bing mines enabled CIL to speed up production growing in the earlier half of the Plan period. Actual production in FY07, nevertheless, was marginally below this mark, at 430.8m metric tons, as it became tougher to pull out farther efficiency additions in the 2nd half of the Plan period.
This slippage is apparent in the downtrend in achievement vis- a-vis the mark over the last four old ages.The cardinal point to observe is non the quantum of slippage in FY08, which is little ( 1.3 % ) , but the fact that the mark could non be achieved even after changeless monitoring from the highest echelons of policy-making ( the Prime Minister holds the Coal portfolio ) .Given the downtrend in existent production vis-a-vis marks, chances of acceleration in growing look dim. Plan paperss factor in 7.6 % CAGR in production in CIL over the 11th Plan period as compared to 5.2 % CAGR achieved in the tenth Plan period.
In the first twelvemonth of the 11th Plan period, CIL ‘s production increased by 5.1 % YoY. The fact that new undertakings are to lend about all of the incremental production over FY08-12 make these marks peculiarly burdensome.
Our interactions with industry experts and analysis of authorities paperss suggest that pre-production phases of alleviation and rehabilitation ( R & A ; R ) and forest clearances are progressively tougher jobs to work out.Environment clearance is a immense challengeHarmonizing to industry beginnings, the cardinal restraints in opening new mines are forest clearance and R & A ; R issues. There have been instances where new mine clearances have been pending with the Ministry of Environment & A ; Forests for 3-4 old ages. Environment clearances at multiple levels- cardinal, province and local-only hold the procedure.
Even if a undertaking is vetted by the Central Environment Ministry, the District Forest Officer has the concluding say. The Ministry of Coal and PSUs have made multiple representations to the Environment Ministry to clearly demarcate “ nogo ” zones so that programs are developed merely for mines with visibleness for having needed proposals. For the allowed zones, coal functionaries have proposed a program for standard compensation to be paid for afforestatio enterprises. However, the environment ministry insists on a individual blessing. As such blessings are typically belated, commissioning of new mines can be delayed by 2-3 old ages.Tribals going more cognizant of their rightsMost of India ‘s coal militias are situated in the tribal belt. Historically, there was no important examination of R & A ; R policies of the coal companies by the locals.
Besides, the compensation paid was non linked to the economic potency of the land acquired. Now, there is increasing political mobilization among locals endeavoring to associate R & A ; R compensation to economic potency of the mine. Better compensation received by tribals in Meghalaya coal mines have had a presentation impact.This could ensue in important addition in start-up costs. A more annoying issue is that locals want employment in the mines in add-on to pecuniary compensation. Companies are ill-equipped to suit a big figure of local population, particularly with fishy occupation tantrum.Protracted dialogues over employment warrant translate into farther holds. Successful agitation against planetary big leagues like POSCO in Orissa has provided a bonus to grass root political mobilization in neighboring provinces of Jharkhand and Chattisgarh.
The three provinces are the topmost coal manufacturers in India.Multiplicity of R & A ; R policies merely add to the holdIndia does non hold an unified R & A ; R policy ; each province formulates its ain policy. Delay in explicating R & A ; R policy acts as another barrier. For illustration, Jharkhand ( the province with the largest coal sedimentations in India ) is yet to finalize its R & A ; R policy.
Policy-making in the province has been paralysed in the absence of a stable authorities over the past twosome of old ages. New mines in the province have to wait for the province authorities to finalize its rehabilitation policies.Besides, most PSUs and railroads have their ain internal guidelines on rehabilitation bundles.
Any mutual exclusiveness between these policies would necessitate to be resolved before the R & A ; R bundle is really rolled out. The province authoritiess might non portion the Central authorities ‘s urgency in speed uping growing in coal production. There are instances where holds have non been resolved even after direct intercession by the highest governments.Area-wise analysis of production programs adds to concernsFurther area-wise analysis of incremental coal production in the 11th Plan period suggests important challenges. Six countries under the PSUs would lend about half of the incremental capacity over the 11th Plan period.
Of the six countries, the two in Orissa could confront important R & A ; R issues, given higher population denseness and recent tribal mobilization in the province against land disaffection. The two countries in Jharkhand could see important jurisprudence & A ; order jobs, as both countries are in the epicenter of Maoist insurgence presently impacting big parts of eastern, south-eastern and cardinal India.Performance of confined units does non animate assurancePlan paperss imagine 86.5m metric tons ( 35 % of incremental capacity ) to be contributed by new confined coal mines.
Due to environment clearance and R & A ; R issues outlined in predating subdivisions, confined coal mines are besides happening it hard to get down production. Of the 39 confined coal blocks allocated over FY93-03, merely 14 had commenced operations by end-FY08.There has been a important acceleration in coal block awards in the last three old ages, increasing outlooks that private enterprise could inculcate more plangency in the sector. Performance on the land is at odds with the outlook. The consequences should non come as a surprise to policy contrivers ; no regulative alterations have been enacted to work out the dentition problems faced by new mines. The same set of R & A ; R and environment-clearance issues plague private coal blocks every bit good.Higher proportion of imports to interpret into cost force per unit areasIn India, coal is merely partly privatised.
Commercial coal production is carried out by PSUs. Private companies can be allocated mines merely for confined usage. As per jurisprudence, coal companies have been free to monetary value coal harmonizing to market conditions since 2000. However, given the authorities ownership of commercial mines, monetary values are efficaciously controlled by the authorities. In order to better realizations, coal companies sell a little proportion of their production in the topographic point market through auctions.
Monetary values discovered through auctions are by and large 20- 85 % higher than notified monetary values. Presently, international monetary values are about thrice every bit high as domestic notified monetary values.As part of imports in overall demand additions, companies would confront higher input costs. In an exemplifying illustration below, we estimate that replacing of 15 % of domestic linkage coal with imported coal could diminish EBITDA per metric ton by 5.
2 % .Large participants would be affected firstIn the event of a deficit in domestic production, supplies to big coal consumers like metals and cement workss would be cut before supplies to SMEs are affected. The policy is based on the principle that domestic production deficit has to be met through imports and big participants would hold the wherewithal to secure foreign coal in economic measures, unlike SMEs, who might non be able to pull off the logistic of coal import.Supplies to big public-service corporations would besides be affected, but major non-utilities would be the first 1s to bear the brunt.
The authorities programs to take down the threshold for punishment payment by PSU coal companies to cement companies from 90 % of assured supply earlier to 60 % now.With the authorities keen on keeping monetary value degrees, big coal users except public-service corporations might non hold sufficient headway to go through on the input monetary value addition. This could potentially interpret into border headwinds for cement and metal companies.