India should see a major upside in coal production over the next five to seven years, which is probably the available window to optimise opportunities.
The possibility of reducing import dependence is looking brighter than ever.
The pandemic and the Ukraine crisis together opened a mid-term opportunity for coal. The pledges made in COP26 were thrown out of the wind as even the developed world increased the use of coal for electricity generation to survive the low availability of natural gas.
COP27 made fresh pledges to cut the use of fossil fuels. However, the prevailing geopolitical realities offer little hope of an early resolution of the uncertainties in the energy market. It means the emerging world will have very few choices in ensuring energy security and fuel growth in the near term.
When the global supply chain is disrupted, it is natural for countries to optimise local resources. Both India and China approved new coal-based power projects over and above their sustained focus on energy transition to greener options.
For the Indian mining sector, this is a godsend opportunity to maximize the production of thermal coal and optimise returns by replacing costly imports. The economy will gain in terms of supply security, less foreign exchange outgo, lower current account deficit and a stable rupee.
Maximise domestic production
India spent nearly $29 billion for importing coal (all types) during the April-September period of the fiscal year 2022-23 (FY23), as against the $30 billion coal import bill in the entire FY22. The share of coal in total imports is nearing eight per cent from less than five percent a year ago.
Strikingly, the import bill skyrocketed despite a dramatic reduction in volumes. From 197 million tonne (mt) in FY20, thermal coal (used in power generation) imports were down to 152 mt in FY22. Most of this coal is replaceable by domestic supply.
India doesn’t have enough geological reserves in oil and gas. But maximising domestic production of thermal coal is possible as is evident in a sharp 112 mt (16 per cent) rise in domestic supplies between FY20 and FY22. This is the sharpest increase in dispatch in a decade.
The state-owned Coal India (CIL) is playing the anchor role in ensuring energy security. They supplied 88mt extra fuel, year-on-year, in FY22, helping mitigate the wide volatility in demand in the Delta virus-hit year.
The higher supplies in FY22 came largely by diluting the stock. As of FY23, CIL is on track to produce 78 mt more fuel. All mining indicators suggest the company is rightly poised to increase both production and supplies substantially in FY24 as well.
Rake supplies a concern
This is a remarkable performance. CIL had good years in terms of both supply or production growth in the past. However, rarely have they moved at such a high pace in consecutive years.
The credit goes to the creation of a congenial and competitive atmosphere by the government. Ever since it came to power in 2014, the Narendra Modi government did its best to fast forward clearances.
Huge progress is made in enhancing the track capacities both through de-bottlenecking as well as through greenfield projects. Typical to this government’s infrastructure focus, projects that were pending for years or were suffering slow growth, saw massive push.
The job is only partly done. The crisis over the last two years exposed the inadequacy of railway rolling stock. According to the coal ministry, the rake availability to CIL was down by eight per cent in October 2022 as against the same period in the previous year.
Among CIL’s mining subsidiaries, top producer Mahanadi Coalfields (MCL) is witnessing a nearly 14 per cent lower rake supply. Ranchi-based Central Coalfields (CCL) received 17 per cent fewer rakes.
It would be unjust to blame the government entirely for the rake shortage. No one expected such a huge disruption in the global energy sector. Till 2020, the world was preparing to shift away from coal.
Opportunity for private miners
And, that opened a vista of opportunities for the private miners. Till 2019, the role of private miners was restricted to either contract or captive mining. The deallocation of mines with effect from March 31, 2015, came as a massive shock to the captive segment.
Though they acquired blocks through auction, aggressive bidding and the global meltdown in coal prices robbed much of the viability of these mines. The user industries – metals, cement, power etc- preferred to lie low on captive production and met demands through open market purchases or imports.
In 2019, India denationalised the coal sector and started offering blocks to private commercial miners. In a parallel move, the captive miners were allowed to sell part production in the open market.
The efforts were in the right direction but the easy availability of fuel in the global market and the then low upside potential of coal were the only concerns, which now stands reversed. Of the 112 mt additional domestic coal supplies between FY20 and FY22, roughly 30 mt came from captive and private commercial mines.
Normally, CIL takes five to seven years to start a new mine in India. By that standard commercial mines are in their infancy. However, surprisingly enough they have already started producing. In the first seven months of FY23, private mines produced over 2mt fuel.
Clearly, the private sector is eager to tap the near-term opportunities. To tap the potential, the government came out with the largest auction of 141 mines in November.
It means, India should see a major upside in coal production over the next five to seven years, which is probably the available window to optimise opportunities. The possibility of reducing import dependence is looking brighter than ever.