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Commercial Coal Mining in India: Evaluating Potential Business Opportunity, Challenges, Risks, Critical Success Factors, Market Entry & Growth Strategy for Private Companies

Commercial Coal Mining in India: Evaluating Potential Business Opportunity, Challenges, Risks, Critical Success Factors, Market Entry & Growth Strategy for Private Companies

  • May 2018
  • 503 pages
  • ID: 5392886

Summary

Table of Contents

Coal sector in India is largely public dominated with Coal India Limited (CIL) contributing almost 80% of total coal production.It has the majority share in coal mining and almost controls the total coal distribution channels of India barring captive coal block production and its use by some of the private developers.

Once coal is being mined and extracted from the coal mines, it finds its way to the end user by various distribution channels.The majority of the coal is being tied up to the end use by long term Fuel Supply Agreements, known as FSA between the coal producer and its consumer.

Some of the agreements are under the arrangement of FSTA (Fuel Supply and Transport Agreement), where railways is third part to the contracts. Apart from FSA, 10 -20% of the coal is reserved to be distributed through e-auction mechanism, which is open to all types of consumer.

CIL is the sole authority to sign fuel supply agreements with the end consumers.Being the monopoly in the coal sector, CIL often resorts to uncompetitive practice and the agreement is heavily skewed towards CIL.

The private companies complain that CIL favors the government sector companies.In the priority list of coal supply, the government companies get the first priority in case of emergency.

With e-auction mechanism, CIL usually gets a revenue boost as e-auction price is 60 to 70% higher than that of FSA pricing. So it is alleged that CIL diverts its coal to e-auction platform rather than providing to its legitimate customers under long-term linkage.

To boost the coal production, Government of India has been allocating coal blocks for captive development to state as well as to private companies.The government had allocated 195 coal blocks to various public and private sector companies.

Out of the allocated coal blocks, 30 coal blocks started production and majority of others sat on the coal block doing nothing.In 2013, many companies were served notices that includes some of the prominent ones like Jindal Steel and Power Ltd, Tata Power Co.

Ltd, GVK Power and Infrastructure Ltd and Jaypee Group.Post this over 204 captive coal blocks were de-allocated and subsequently some 70 blocks were awarded based on revised auctioning procedure.

However, as against expected 100-mt coal production through the captive route in 2016-17, only 50% of this target was achieved. The limited success in limited privatization in form of captive coal block auction, was like government hitting a wall and had to take some radical measures and that what seems to be the key trigger for government to open up the sector for commercial mining.

The Government of India has finally taken a plunge to open up its closely guarded coal sector, thereby ending the decades old monopoly of state-run Coal India Ltd (CIL) and its affiliates, marking a long expected reform aimed at boosting investment and output.The move is also seen as lowering prices and imports while introducing better technology, apart from saving on foreign exchange and improving energy security.

The coal sector was nationalized in 1973.On 20th February 2018, the cabinet committee on economic affairs (CCEA) approved the methodology for auction of coal mines or blocks for sale of coal under the Coal Mines (Special Provisions) Act, 2015 and the Mines and Minerals (Development and Regulation) Act, 1957.

Allowing the private sector to enter coal mining is expected to lift supplies and moderate prices while boosting investment.Non-state coal mining had thus far been allowed only for captive use.

The Coal Mines Special Provision Act 2015 provided for opening up commercial coal mining to private and public entities. The government had in 2016 awarded coal blocks to state mining corporations for commercial mining. Coal India and its affiliates account for about 80% of total coal output.

The government will hold forward auctions to select developers for commercial coal blocks.The auction process will be transparent like in the case of captive coal blocks and will be based on the amount companies agree to pay as auction fees per tonne.

The two-stage bidding will start with the invitation of technical bids and there will be no end-use or pricing restrictions on the commercial coal blocks.The revenue earned from the auctions will go to the states where the coal blocks are located.

The government is in the process of identifying a few large and mid-sized coal blocks for auction for non-captive purposes and is yet to fix timelines.The move will allay nerves of new power plants that were unsure of getting fuel supplies in a no PPA scenario as they can now contract with commercial coal suppliers to revive their projects & sustain operations.

This move lead to newer business models in the energy sector and one call see fuel management companies to integrated energy companies focusing on pithead to socket model in power sector. The move will attract FDI from global companies that were waiting on the fence for coal sector privatization and likes of BHP Billiton, Rio Tinto, Glencore, Vale, etc could soon chalk out and entry strategy to India’s huge coal mining sector.

InfraInsights research report “Commercial Coal Mining in India: Evaluating Potential Business Opportunity, Challenges, Risks, Critical Success Factors, Market Entry & Growth Strategy for Private Companies”, aims to provide indispensable information on coal sector in India, demand ~ supply dynamics, issues & challenges, unmet business needs of coal consumers, opportunity for private players and lessons that can be drawn from failure in materialization of production targets from auctioned coal block. The report will be an indispensable source of information for all private companies that would want to enter the coal sector in India and tap the commercial mining route.

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