4 Coal Insights, October 2014

COnTEnTs

32 | INtERvIEw‘SC penalised allocattees while finding fault with allocation process’Give original allottees the first right of refusal, says Amitabh Mudgal.

44 | IN FoCuSNow, an improved fuel from plastic waste!Bioenergy Sciences offers APF with better calorific value than coal.

18 | CovER StoRyDirty coal comes clean?Dust seems to settle in coalgate, but industry says issues remain.

44 | CoRpoRAtE SCCL banks on Adriyala to augment outputCommercial production at Adriyala will commence in November.

49 | INtERNAtIoNALIndonesia’s ET may eat into India’s importsNew norm for ‘listed exporter’ status elicits mixed reactions.

6 Spot steam coal prices ease in October

8 CokingcoalpricesflatinOctober

10 Coal India’s H1 production up 5.13%

12 India’s coal imports may touch 200 mt in FY15

14 India’s cement output falls 9.26% in Aug m-o-m

16 India’s power generation down 4.54% in Sept

20 De-allocationfine,whataboutcoallinkages?

22 Nation to suffer

26 New challenges for coal sector

37 Supreme Court verdict unfortunate

41 J K Lakshmi eyes 18 mt production capacity by 2018-19

43 HEC chalks out `1,050 crore modernisation plan

45 MCL land stalemate is over, may achieve production target

49 US coal consumption to grow 1.7% to 941 MMst

52 Railways’ Sept coal handling falls 2.26% m-o-m

53 Thermal coal handling by major ports at 39.59 mt in Apr-Sept

54 Annexure

55 E-auction data

56 Port data

18 Coal Insights, October 2014

COvER sTORy

Dirty coal comes clean?

After two long years of speculation, the coal scam has come to its logical conclusion. Almost all of the captive coal blocks have been cancelled by the Supreme Court and the government has announced its plan to auction the

same within three-four months (initially, to the private companies having end-use plants). It has also said that through an

ordinance it may create the provision for allowing commercial coal mining by private miners

in future. While that seems to settle the matter, India Inc. says, in most cases on

condition of anonymity, that issues remain…!

“The origin of the scam,” said a veteran coal industry official,

“can be traced to the fact that captive coal blocks were taking too long to come to the production stage. This delay called for attention and the statutory auditor, the Comptroller and Auditor General (CAG), thought of looking into what was going wrong.”

Subsequently, there surfaced the country’s

biggest ever scam, a notional loss of around Rs 187,000 crore

to the exchequer. “Thereafter, numerous steps were taken and

probes conducted, but the core issue, i.e. production delay, was lost. Today, if

those blocks are allotted through auction, they are likely to face similar hurdles as they

faced two years ago,” the official said.“Now the industry claims that a huge sum of

money – much more than the notional loss to exchequer – has been expended on developing the blocks and setting up end-use plants. These investments face the risk of becoming bad investments. And nobody seems to have an answer as to what can be done to pre-empt the wastage,” he added.

Inglorious uncertaintiesAnother issue that remains unaddressed is the fate of allied segments such as mine developer-cum-operators (MDOs), contract miners and equipment leasing firms.

Coal Insights Bureau

Coal Insights, October 2014 19

COvER sTORy

According to sources, the cancellation of blocks threatens to send many pure-play MDOs out of business.

“We are yet to think out about the alternatives. All that we can say is that till March 2015 we are in coal business,” said an official of a Kolkata-based MDO engaged in a producing captive coal block.

In similar quandary are the state mining agencies which were allotted blocks through the state dispensation route. These entities are facing uncertainty over their eligibility to take part in the proposed auction of coal blocks in future.

“We were allocated the blocks through the state dispensation route. But now those blocks have been cancelled and we are not sure if we will be allowed to take part in the auction,” an official from a state agency told Coal Insights.

This is so because the state dispensation route was declared by the court as “violative” of the Coal Mines Nationalisation Act, 1973 as well as the Mines and Minerals (Development and Regulation) Act, he said. “Unless there is any declaration from the court or the government in this regard, we are in the dark if state agencies will be found eligible to take part in the auctions,” he added.

Along with them, their consumers are facing uncertainty as to where from they will source the material, the official said. For instance, a power utility that used to get coal from its captive mine (which is producing) and also from a state agency is now stripped off both the sources.

Impact on Rupee?As the domestic sources dry up, coal consumers are looking up to imports which has already jumped to the level of 181 million tons (mt) in 2013-14. The dual impact of a cut in e-auction sale of coal to 25 mt and the uncertainty over captive coal supply would push the Indian coal consumers further to this ready source, industry sources said.

“We expect coal imports to go substantially in the coming months. Besides power plants, there will be steep increase in imports by the cement and textiles sectors. The yearly volume may go close to 200 mt in 2014-15,” a leading importer of steam coal said.

Asked about the impact of the increased coal imports on the currency, a Mumbai-

based analyst said, “It is difficult to say if this will put pressure on Rupee. Currently, we do not see any reason to panic.”

However, trade data shows that trade deficit (merchandise) for the month of September, 2014 provisionally rose 132.71 percent to $14,247.42 million compared to $6,122.34 million reported in the same month a year ago.

“This phenomenal increase in trade deficit is mainly due to rise in imports without adequate rise in exports. Imports have increased mainly due to an unusual growth of 449.7 percent in imports of gold and 105.6 percent in imports of metalliferous ores and other minerals over the same period last year,” an official release by the Ministry of Commerce and Industry said.

This implies that it will not be the best of times for a sudden jump in coal import bill, which may cross $20 billion in the current year.

Silence of the industryMore insalubrious would perhaps be the impact on investor sentiment. Ever since the cancellation order came, the India Inc. has been maintaining a grim silence. While a few companies directly affected by the decision issued cautious reactions, the industry chambers remained tight-lipped.

Commenting on the impact, the analyst said, “Definitely the cost of production will go up for the manufacturing sector, as the companies will have to import coal. The shortage of coal could lead to some industrial activity closing down or working at lower

capacity. But the most conspicuous effect will be on investor sentiment.”

He further said, “Henceforth they will be careful in analysing any such coal block. This will lead to less investments being made by investors, due to uncertainty.”

A pointer to this disappointment was the stock market performance of the 10 listed companies which are already producing from their captive coal blocks. After the Supreme Court judgement, these stocks declined by an average 15 percent on the Bombay Stock Exchange in two days.

“If Nokia’s exit came as a big jolt, cancellation of producing blocks is another major blow to overseas investors who are keeping watch on the Indian market. The government must act fast to send a reassuring signal,” said an industry source.

The bright sideThe apex court, while delivering the judgement, had considered all possible adverse impacts and still kept faith on the government’s ability to handle them in a time-bound manner. This comes as a good opportunity for the NDA government to show its capability in tackling difficult issues.

The idea is to put in place a fair and transparent system of block allocation without making the economy suffer much. Deft handling of the situation would not only mitigate the adverse effects, but will enhance the industry’s confidence in the present regime. Once through, the government should replicate the same in similar other sectors.

32 Coal Insights, October 2014

‘SC penalised allocattees while finding fault with allocation process’

The recent Supreme Court judgement, which called for cancellation of 214 captive coal blocks, has created a turmoil for the allocattees as availability of this raw material, so essential for the coal consuming industries, has been put at stake. In such a scenario, Amitabh Mudgal, President,

Marketing & Corporate Affairs, Monnet Ispat & Energy Limited, tells Sanjukta Ganguly of Coal Insights that the first right of refusal should be given to the original allocattee. He also added that the company will participate in the proposed auction to secure fuel for its ongoing projects.

The government lost money by not auctioning the blocks. Now, the industry makes a loss on the investments made in the end-use plants by surrendering the blocks. What will be the impact of this double whammy on the economy?

Media hype has not allowed the true contents of the Comptroller and Auditor General (CAG) report to come into the public domain. The CAG said, “A part of this financial gain could have been tapped by the government. by taking timely decision on competitive bidding for allocation of coal blocks.” So please read carefully that a part of the `1.86 lakh crore could have gone to the government if the auction route had been adopted. Moreover, even this calculation is based on the selling price of CIL in the year 2010-11. If we consider prices of the earlier years, this amount could be even lower. The CAG mentioned in its report that underground mines are making losses but have not included the same in arriving at the financial gain.

So far as losses to the industry are concerned, investments in the coal blocks and

associated end-use plants (EUPs) have been made after receiving the sovereign promise from the Government of India. As per the Ministry of Coal (MoC), a total investment of `286,677 crore has been made in 157 coal blocks and end-use plants as on December, 2012. As reported in the newspapers, this investment has gone up to `4 lakh crore and almost 10 lakh people are employed.

This huge investment is supported by debts from banks and financial institutions. As a result of de-allocation, there is every possibility of stress being induced in the assets which may also result in non-performing assets (NPAs). So, it is a national loss having its financial impact on the economy.

What is the status of the blocks allotted to the company? What is the status of and investments made by Monnet Ispat on the corresponding end-use plants?

Monnet Ispat & Energy Ltd was allotted coal blocks for various end-use plants wherein one is so far the largest operating underground coal mine in the country,

and in production since 2004-05. This mine has set new benchmarks in terms of safety, output per man shift and LHD performance. Two other blocks were allotted in the state of Odisha where all the milestones have been achieved, land has been acquired, Environmental Clearance (EC) and Forest Clearance (FC) have been obtained but the mining lease could not be signed by the state government as the matter (allocation of the coal blocks) was sub-judice in the Supreme Court (SC). Based on sovereign promises made by the Government of India in terms of letter of allocation of coal blocks, the company has set up a steel/sponge iron plant at an investment of about `7,200 crore in the state of Chhattisgarh which is already operational and a 1,050-MW independent power plant is being set up in the state of Odisha, which is expected to be commissioned by March, 2015. So far, more than `5,000 crore have been invested in this power plant. Apart from these, several man hours have been spent in acquiring land, resettlements and rehabilitations and other CSR activities.

InTERvIEw

34 Coal Insights, October 2014

InTERvIEw

be auctioned expeditiously and can bring revenue to the government faster as all the required information/detail is available. Even the attorney general has said, for the interim period, till the auction is conducted, these can be given to CIL.

Investments in the EUPs have been made after receiving a sovereign promise from the Ministry of Coal. If these EUPs are not allotted mines in the auction, this may result in NPAs, thereby putting stress on banks (public money).

Inter-dependence of a mine and an EUP in terms of pithead location will otherwise again lead to irrational linkage, ie, mined coal going to farther distances and the existing EUP getting coal from other mine, thereby putting pressure on infrastructure and increasing total ownership cost.

What should be the methodology (eg, online auction, low floor price) and approach to attract bids in the auction? This is to pre-empt a situation like the recent auction of three blocks which failed to evoke response.

Auction of coal blocks should be conducted as soon as possible and allocation should be made before March 31, 2015 so that the operations of existing plants are not adversely affected. Majority of coal blocks should be auctioned in one go to avoid a situation of artificial scarcity of coal. Operational mines have all the clearances, permissions, geological details etc in place and can be auctioned sooner than non-operational blocks.

The reserve price and upfront payment should be based on actual mineable reserves (as assessed by CMPDIL/IBM) only. We have to understand that the price of imported coal can never be compared with

that of domestic coal as Indian coal is of high ash content. Imported coal is ready-to-burn unlike captive coal where the allocatee first has to invest time, talent, resources and money, obtain various statutory clearances to get the coal unearthed. If the coal is auctioned keeping the imported coal price as basis, why will a company prefer to get the coal blocks instead of ready-to-burn imported coal? Hence, the price discovery in terms of reserve price/floor price has to be arrived at looking at domestic situations. For price discovery, it can be a closed bid or open auction and once the final price is arrived at, RoFR should be given to the original allocatee. Please note that open auction is a long and tedious process. If the reserve price has been worked out then closed bids can also be accepted. To make the auction more attractive, there should be some upfront payment and then royalty per ton on coal produced during the life of mine. In the recent auction of coal blocks, the upfront payment was 10 percent of the intrinsic value of the coal block. A similar method can be adopted in future auctions too.

Is there any basic difference between free allocation of mining blocks and incentives/subsidies given to industries for promotion/protection?

No, there is no difference. In both cases, the basic objective is to encourage investment in setting up manufacturing units which provide employment, revenues, sales tax, VAT, cess, excise, income tax etc. As a matter of fact, this was the case way back in 1993-94 when we were invited to take coal blocks instead of linkages. We should be grateful to our visionary planners who could foresee the acute shortage of coal in the country and the fact that Coal India

The first right of refusal (RoFR) should go to the original allocattee, even if (it comes) at 5 percent mark-up on

the highest bid amount. These EUPs are interlinked with specific mines in terms of proximity and evacuation

arrangements are in place.

How will the company meet the coal supply gap in the future? What will be the impact on production costs?

We understand that while briefing the SC, the attorney general assured the court that the government is ready with all the consequences, and we hope that this is the time for the government to let the industry know its preparedness. Immediate coal linkage should be provided by the government to the operational or soon to be operational plants. We will try and secure blocks during the auction. The impact on costing will depend on sources of coal procurement -- like e-auction and/or import, reserve price bids arrived at in the auction.

The iron & steel, cement and power sectors would be significantly impacted by the coal block de-allocations. This would adversely impact costing of all these plants as they would have to rely on more expensive coal from external sources to meet their fuel requirements. The effect of this will not be restricted to these plants only. The ripple effect will be felt in the entire industry and economy of the country.

Will your company go for auction of the same blocks, if and when offered?

As the plants and other facilities have been set up based on these blocks, we will definitely participate in the proposed auction. The auction should also take place as soon as possible. Current operational mines can be auctioned immediately as all data is already available.

Should the government offer preference or largesse to companies that previously held them?

Yes. The first right of refusal (RoFR) should go to the original allocatee, even if (it comes) at 5 percent mark-up on the highest bid amount. These EUPs are interlinked with specific mines in terms of proximity and evacuation arrangements are in place. As such, putting no additional burden on already stressed infrastructure facilities will be in national interest.

Any thought of giving a running mine to CIL and not auction will be erroneous as the Supreme Court suggested all blocks should be auctioned. Moreover, running mines can

44 Coal Insights, October 2014

CORPORATE

Re-tender for Kakatiya project

While the commencement of Adriyala project infuses fresh blood in SCCL’s performance, the delay in another important UG longwall project comes as a dampener. This is so because the Kakatiya longwall underground project of SCCL is going to be delayed as the company will go for re-tendering to appoint a technology provider-cum-operator (TPO).

“The tender for the TPO has been withdrawn and we are going for re-tendering,” said the official.

He said workers are currently engaged in “peripheral work” at the project, but progress will start only after the re-tendering process is over. “As it stands now, I think it will take at least three years for the project to start production,” he said.

Earlier, the Kakatiya longwall project was expected to start operations from 2015-16. The project is slated to have a peak production volume of 2.747 million tons per annum (mtpa).

Production commences on pilot basis

SCCL banks on Adriyala to augment output

Coal Insights Bureau

The much-awaited Adriyala longwall underground mining project of Singareni Collieries Company Ltd

(SCCL) has started pilot production on October 11, 2014, and will start full-fledged commercial production starting November, a company spokesperson told Coal Insights.

“We have started production on a pilot basis. Full-fledged commercial production will start by late October or the first week of November,” the official said.

Asked about the output estimated for the first year of operations, he said, “it can be estimated only after witnessing the performance in the initial months.”

Adriyala is touted as Asia’s biggest longwall project and will have a peak production level of 2.81 million tons per annum (mtpa). It involves an investment of Rs 846 crore and is the biggest project undertaken by SCCL so far. The project will feed NTPC’s Ramagundam power station in Telangana.

Although it is too early to forecast Adriyala’s output in the current year (2014-15), SCCL is said to be banking on the contribution from the project to achieve its yearly target. The company’s performance has not been up to the expectation so far this year. During the first six months (April-September) of 2014-15, coal production from its 49 mines stood at 21.344 mt, about 11 percent lower than the target of 24.018 mt set for the period. Also, total off-take during

the first six months was 24.771 mt, against the target of 25.759 mt.

There, however, has been an improvement in the last couple of months. In August and September, the company achieved the monthly production targets after missing the numbers in previous four months.

Going forward, the official said, the company is expected to see a significant increase in its monthly data, courtesy the commencement of the Adriyala project. “Overall, we expect to end up with a production of around 54 mt this year,” he noted. The annual production target for 2014-15 stands at 55 mt. In 2013-14, SCCL’s production was 50.47 mt.

UG production to rise in FY15The commencement of the Adriyala project is also likely to bring another accolade for the Telengana based miner. In contrast with the declining trend in underground (UG) production in the country, SCCL is expected to see a growth of about 15% in UG output in 2014-15, the official said. “We expect UG production to rise this year to around 12-13 mt. As I said, it is still early to say what will be the incremental production from Adriyala this year, but it will definitely boost our UG production,” he justified.

In 2013-14, SCCL’s UG coal production was 10.36 mt. The miner had suffered a decline compared to 11.5 mt achieved a year ago. Overall, India’s UG production was down by almost 11 percent in 2013-14.

SCCL eyes mine acquisitions in

Mozambique, SAAt a time when Coal India Ltd (CIL) is undertaking the final phase drilling at its twin blocks in the Tete Province of Mozambique, Singareni Collieries Company Ltd (SCCL) has decided to explore opportunities in Mozambique and South Africa.

“We are working on our plan (for overseas mine acquisition). A top official will be visiting South Africa and Mozambique on October 18,” a company source told Coal Insights.

He further said a full-fledged committee will be formed after getting the initial feedback from this visit. Meanwhile, SCCL has sought CIL’s experience in this regard, he said.

“We talked to CIL for its experience. We talked to Coal Videsh. In fact, our people are expected to visit the blocks of Coal Videsh (promoted by CIL) in Mozambique during their stay in that country,” he added.

Tear

alo

ng th

e do

tted

line

Tear

alo

ng th

e do

tted

line

Coal Insights, September 201458