The focus now in the coal sector is not only on efficient allocation of resources, but also timely development and production of the commodity.
The movements in the global commodity markets have added to the intensity of the changes and dynamism of the demand-supply equilibrium in the coal sector. The de-allocation of 204 coal blocks by the Supreme Court of India, followed by the auction of coal blocks under the new regulatory regime, increase in the Clean Environment Cess (CEC) by eight times (since its introduction in July 2010), announcement of the auction of coal linkages for both power and non-regulated sector, announcement of blocks for commercial mining, etc., have changed the set proportions of the industry and developed intuitive waves among sector players and investors on what´s next.
As per estimates by the Government of India, coal demand in the country is expected to be in the range of 1.2 to 1.5 billion tonnes (BT) by FY 2020. The government had launched the ´Power for All´ campaign in April 2015, under which it plans to provide affordable power to all houses by 2019. Despite being the third largest coal producing country in the world, India is dependent on imports to meet around 20û25 per cent of its coal demand.
Ironically, despite India having more than 300 BT of coal reserves, around 90 per cent of these reserves are made up of non-coking coal. But despite this, non-coking coal accounts for nearly 75û80 per cent of the Indian coal imports. In order to meet this massive demand and minimise the imports of coal (especially non-coking coal), the government has put coal production in the country on fast track and has set a target of 1.5 BT of domestic coal production by FY 2020.
To meet this target, the government has set a goal of 1 BT coal production for Coal India Limited (CIL) by FY 2020. The remaining 500 million tonnes (MT) is expected to be achieved by Singareni Collieries Company Limited (SCCL) and other public and private sector producers.
For the country to reach this ambitious target of 1.5 BT, all players - be it CIL, SCCL or block owners - would have to increase their share. To achieve the coal production target of 1.5 BT, huge investment adding up to more than Rs.10 lakh crore is required in coal mining and its allied sectors like power, steel, cement infrastructure for logistics, and coal washeries.
Given the various policy developments in domestic coal sources and global turmoil in the coal market, the demand-supply dynamics in the country are expected to undergo a great degree of change and variation, as coal consumers see more options now and may be in a Catch-22 situation on the available options. The auction of coal blocks has made a substantial quantum of coal resources available with consumers, but the challenges remain in maintaining sustainable economics of projects at the quoted prices. The industry players may prioritise asset utilisation over aggressive asset generation (by procuring additional coal resources) to mitigate the risks of developing non-performing assets.
A cautious approach from the government and coal consumers is required to ensure that there is clarity on the market dynamics. The government should therefore focus more on sustainable augmentation of the sector and try to achieve maximum exploitation of the resources available in the market before adding more resources to meet the near-term demand. The government and private coal producing companies may also need to focus on technological advancements, addressing issues pertaining to land acquisition, manpower availability, water supply, etc., in order to run this production growth apace.
India is the third largest coal producer in the world after China and the US. The total coal production in India was around 612 million tonnes (MT) in FY 2015, which has increased to 626 MT in FY 2016. Ninety per cent of the domestic production comes from public sector coal producers while only 10 per cent is produced by the private sector. India imported a total of 212 MT of coal in FY 2015 and 193 MT in FY 2016, which is equivalent to one-fourth of the domestic coal consumption in the country based on tonnage.
Over the period of five years from FY11 to FY15, there has been a substantial increase in the share of imports to fulfill the country´s coal consumption requirement. The imports of coal in India have increased at a rate of around 25 per cent annually over the five years ending FY2015. Imports of coking coal have increased by around 75 per cent over this period, whereas imports of non-coking coal have increased by a whopping 250 per cent over the same period. The significant increase in import of non-coking coal is despite the fact that the country is endowed with large quantum of coal resources (306 BT), of which around 90 per cent comprises non-coking coal. In FY 2016, total coal imports by India fell by 19 MT, though still constituting nearly 24 per cent of the total coal consumption in the year based on tonnage.
The value of Indian coal imports in FY 2015 was around `955 billion, while in FY 16, the value of Indian coal imports reduced to `721 billion, around 25 per cent lower than the previous year. Given the rising coal demand driven by the economic and infrastructural growth projected for the country, and the high import bill of the country, it is imperative to augment domestic production and minimise dependence on coal imports in the coming years, especially non-coking coal that accounts for 80 per cent of total coal imports.
CIL is the largest coal producer in the world with production of around 536 MT in FY 2016, an increase from 494 MT in FY 2015. The company developed a roadmap in 2015 for meeting the challenge of achieving 1 BT of coal by FY 2020. The roadmap of CIL for FY 2020 (released in May 2015) provides the list of planned projects (535 mines) which added up to 908 MT. Of the 908 MT, 165 MT would be from existing operating projects, 561 MT from projects under implementation (development or ramp-up phase) and 182 MT would be from future projects.
The subsidiary-wise break-up in coal production is expected from the seven subsidiaries of CIL:
The Singareni Collieries Company Ltd (SCCL) produced around 60 MT of coal in FY 2016 and had a production of around 52 MT during FY 2015. It has around 47 mines, of which 16 are opencast mines and 31 are underground mines. In order to achieve the target of 100 MT by FY 2020, SCCL is planning to start 20û25 new mines in the near future, of which seven mines are expected to start production in FY 2017.
Production target other than CIL and SCCL
Pre-nationalisation mines: The mines of IISCO (now with SAIL) TISCO, and DVC, which were allotted before nationalisation, produce around 10 million tonnes per annum (MTPA) at present and may continue to contribute the same production volume to the 1.5 BT target in FY 2020.
Non-deallocated mines: The four coal mines that were not deallocated by the Supreme Court, i.e., Tasra (SAIL), Parki- Barwadih (NTPC), Moher and Moher Amlori Extension (Sasan UMPP-Reliance Power) are expected to contribute around 30 MT of coal by FY 2020.
Schedule II mines: The 35 mines allocated under schedule II (17 auctioned and 18 allotted) may together contribute around 73 MT of coal production by FY 2020 at their peak rated capacities. These mines are those which were already in the coal production stage or ready for production at the time of deallocation by the Supreme Court.
Schedule III mines: The 34 mines allocated under schedule III (14 auctioned and 25 allotted) may together contribute around 208 MT of coal production at their peak rated capacities. These mines are those which were soon to come into production at the time of deallocation by the Supreme Court.
Coal blocks yet to be allocated through competitive bidding: In order to meet the balance of the target of 1.5 BT of coal production, the 14 coal blocks allocated under the Auction by Competitive Bidding of Coal Mines Rules,2012, would have to contribute around 79 MT of coal production by FY 2020. These coal blocks have combined resources of more than 7 BT.
Estimation vis-a-vis targets
The target of 1.5 BT of domestic coal production in FY 2020 is ambitious and challenging. This section analyses the various production scenarios for CIL, SCCL and other coal blocks based on production plans, historic performance and progress of upcoming and future projects.
In FY 16, CIL was operating 430 mines. In its roadmap, CIL has planned to achieve 908 MT from 535 coal mines in FY 2020. Thus, CIL´s total number of operating mines will increase at an average of 26 per year till FY 2020. As per a presentation by the Central Mine Planning and Design Institute (CMPDI), dated 20 January 2015, additional nine projects with a capacity of 17 MTPA have already received in-principle approval while another 15 mines with combined capacity of 29 MTPA are awaiting approval from CIL and/or its subsidiaries. Typically, it has been observed that it may take four-five years for a greenfield mine to achieve a rated production after the commencement of the development stage.
Considering these timelines, it would be difficult for additional mines identified (beyond 908 MT) to achieve their rated capacity production till FY 2020.
CIL has increased its production by 9 per cent last year, which is significantly higher compared to its performance in the last 10 years, when its production grew at a compound annual growth rate (CAGR) of only 6 per cent. Hence, in this base case (Scenario 1), CIL is expected to reach up to 908 MT by FY 2020. In order to achieve this target, CIL is required to increase its production at a CAGR of 14 per cent between FY 16 and FY 2020. It may be difficult but not unachievable.
Over the past five years, the average production target achieved by CIL is around 97 per cent and thus the same is considered as the most likely scenario. In case such a trend continues and CIL ensures to meet at least 97 per cent of the annual target, CIL would be able to achieve up to 881 MT by FY 2020 (Scenario 2) which would require a CAGR of 13 per cent.
The Ministry of Coal´s annual report for FY 2015û16 provides the anticipated date of completion for all the ongoing and future projects. Considering an anticipated date of completion, an assessment of project-wise status of all the mines, which are identified by CIL in its roadmap, leads to 871 MT of coal production from CIL in FY 2020 (Scenario 3). Majority of the projects, except for 19 mines, were found to be progressing as per CIL´s roadmap plan. Nineteen mines, whose project schedules are delayed, are expected to have delayed production which may result in a difference of 37 MT from the planned production of 908 MT.
CIL will need to focus on the three MCL projects mentioned above to ensure the planned production of 908 MT. To summarise, in the three scenarios identified, coal production is estimated at 908 MT in first, 881 MT in the second scenario, and 871 MT in the third scenario, implying CAGRs of approximately 14 per cent, 13 per cent and 8 per cent in these scenarios respectively for the next four-year period between FY 2016-2020.
Thus, to ensure that CIL´s production goal is met, it is desirable to put thrust into basic issues that impact the development, progress and operations of coal mines and coal production, such as land, water, environment, allied infrastructure, equipment, and skilled manpower. While the plausibility and status of all these factors has been ascertained in the subsequent sections, it is evident to understand the downside if such factors are not addressed properly.
Subsidiary-wise coal production scenarios
Production from Mahanadi Coalfields Ltd (MCL) and South Eastern Coalfields Ltd (SCL) is expected to account for 53 per cent of the total production targeted by CIL in FY 2020 as per the roadmap document. In the second scenario, all the subsidiaries are expected to achieve 97 per cent of the targeted production, and the aggregate of MCL (28 per cent), SECL (26 per cent), Central Coalfields Ltd (15 per cent) and Northern Coalfield Ltd (12 per cent) shall account for 80 per cent of the total production in FY 2020. In the third scenario, some large projects of MCL are expected to be delayed, and thus the percentage share of MCL out of the total production of CIL is expected to reduce to 25 per cent (second to SECL). However, the aggregate production of SECL, MCL, CCL and NCL will be more than 80 per cent of the total production in FY 2020.
Production from SCCL mines
SCCL is the second major coal producer in India after CIL. In order to meet the government´s vision of 1.5 BT of coal production in India, SCCL is required to produce 100 MT of coal by FY 2020. In FY 2016, SCCL has produced 60 MT of coal, while it has set a target of 10 per cent growth rate this year and an annual production of 66 MT. If it keeps increasing its production by the same rate for the next four years, it will reach very close to 100 MT production in FY 2020.
Although, unlike CIL, SCCL has not issued any roadmap plan for achieving any target in FY 2020, annual reports of SCCL and the Ministry of Coal provides list of brownfield and greenfield projects which shall be executed in the next few years.
In summary, coal production is estimated to be 100 MT, 96 MT and 85 MT, implying CAGRs of 14 per cent, 13 per cent and 10 per cent for the period between FY 2016 and FY 2020, in the above-mentioned three scenarios respectively.
Around 87 per cent of the proved coal reserves and majority of the present coal production is concentrated in the eastern (Odisha, West Bengal and Jharkhand) and central (Madhya Pradesh and Chhattisgarh) regions. While 49 per cent of the coal-based installed capacity is in the northern and western regions (coal demand regions), a geographical mismatch remains between the demand and supply centres of coal.
The production targeted by CIL´s subsidiaries in FY 2020 shows that 93 per cent of CIL´s production will remain concentrated in the eastern and central regions. Furthermore, more than 80 per cent of the mines auctioned/allocated are in these regions. In FY 2020, the northern and western regions are expected to emerge as major centres for coal demand. Thus, an efficient transportation infrastructure for movement of coal will play a crucial role in Vision 2020.
Meanwhile, overutilisation of existing line capacity (both high-density network and other routes) of Indian Railways has been a major hurdle in efficient coal evacuation. Around 40 per cent of the sections are running at over 100 per cent line capacity. Further, 65 per cent of the sections on the high-density network are running at over 100 per cent line capacity. As mentioned before, future coal production will remain concentrated in the eastern region. To handle the growth in coal production and reduce congestion on the railway networks (see graph) in these regions, large-scale capacity augmentation of the railway system will be required.
Govt steps in
CCL (Jharkhand), MCL (Odisha) and SECL (Chhattisgarh) together will account for 70 per cent of the targeted 908 MT of coal production in FY 2020. Further, approximately 70 per cent proved coal reserves of India are located in these states. Of the 121 projects indentified by CIL, which are facing issues related to coal evacuation through rail, 72 projects are from CCL, SECL and MCL. Thus, the three strategic lines were identified by CIL for improving evacuation of coal from CCL and SECL. A special purpose vehicle has been formed in a tripartite partnership between the Ministry of Railways, Ministry of Coal and the respective state governments for these projects.
Dependency on railway projects
As per the roadmap scenario, approximately 45 per cent of the targeted production for CCL in FY 2020, i.e., around 60 MT, is dependent for coal evacuation on the Tori-Shivpur-Kathotia railway line. The Tori-Shivpur section is expected to be completed by 2016û17. The undecided timeline for completion of the Shivpur- Kathotia section (49 km) due to uncertainty in land acquisition and forest clearances, can prove to be a major hurdle for CCL.
Mines with total capacity of 72 MT are dependent on the Jharsuguda-Barpali-Sardega single line, but as per the roadmap scenario, only 42 MT will be produced from these mines in FY 2020. The Jharsuguda-Barpali line will handle 34 MTPA coal dispatch; however, after construction of the double line, this capacity will increase to 60 MTPA. The single line is expected to be complete by June 2016, and the double line by March 2019. Thus, timely completion of these critical projects will ensure the required coal movement.
The Angul Kalinga connectivity will serve the 20 MTPA Bharatpur opencast project (OCP). The scheduled date of completion for this project was March 2016. Commencement of this line will increase 15 rakes per day (60,000 tonnes per day). East Rail Corridor, a ´special railway project´ declared by the Ministry of Railways will be used for coal movement from the Mand-Raigarh coalfield of SECL. This project is expected to be completed by FY 2018. By FY 2020, the mines dependent on this corridor will produce 29 MT as per the roadmap document.
Another critical coal evacuation project for SECL is the East West Rail Corridor. The expected date of completion of this corridor is FY 2020. Any further delay in this corridor may hinder SECL´s target plan, as mines dependent on this corridor will produce approximately 50 per cent of SECL´s target production in FY 2020.
To achieve the ambitious coal production targets set by the Indian government, strong and focused efforts are required from all stakeholders, especially governments, industry players, investors, funding agencies, and infrastructure developers. Some of the key focus areas that require specific efforts to achieve these targets are discussed below.
(This article has been authored by Kameswara Rao, Leader, Energy, Utilities and Mining and Pukhraj Sethiya, Associate Director, Mining and Metals, PricewaterhouseCoopers India)