BackIndia coal output closer to ending years of disappointment
While India's coal imports have steadily risen and gained 19% last year, there are signs that India is taking the right steps to boost its domestic coal industry
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Launceston: One of the most common assumptions among coal watchers is that India’s rising demand will translate into increasing imports, thus providing one of the few bright spots for a beleaguered industry.
While there is little doubt about the bullish demand outlook for India, the belief that imports will have to rise is predicated on the view that domestic coal output will continue to disappoint.
If history is a guide, then this is a safe bet, with state-controlled behemoth Coal India Ltd consistently failing to meet output targets and battling to supply enough fuel for the South Asian nation’s electricity generators.
India’s coal imports have steadily risen and gained 19% last year to 210.6 million tonnes, making the country the world’s second-biggest importer after China and ahead of Japan.
But it may pay to heed a warning that accompanies financial products that past performance isn’t necessarily a guide to future outcomes.
There are signs that India is taking the right steps to boost its domestic coal industry, and while these won’t necessarily bear immediate fruit, it’s always worth watching the trend.
Once trends start, it becomes difficult to stop them. Just ask any coal miner who exports to China, which has gone from being the industry’s greatest hope for long-term growth to the bleak prospect of a declining market.
The new government of Prime Minister Narendra Modi has shown some determination to reform India’s vast coal sector, starting with making Coal India more efficient.
The government raised about $3.6 billion by selling a 10% stake in Coal India last month, part of its plan to raise $10 billion by selling assets.
But more important, from a coal market perspective, than the cash raised was the level of interest shown by investors, with the share offer oversubscribed.
This is not only a vote of confidence that the government is prepared to tackle the bureaucratic issues holding Coal India back, but also will act to improve the company’s rather dismal operational record.
Having more private investors on board will help drive change within Coal India, given fund managers are likely to push for improved returns and ask uncomfortable questions of management should they fail to deliver.
More competition coming
“India is also pushing ahead with plans to open up the coal mining sector to private and international investors," Piyush Goyal, the coal and power minister, said on 8 January.
This comes despite union opposition to the move, however a planned five-day strike in January was called off after two days when the government assured a committee would be formed to address worker concerns over the process.
So far global miners have been cool on the prospect of investing in India, most likely because of complex bureaucratic procedures and a playing field titled in favour of Coal India.
The coal divisions of the large miners are also hamstrung by the current low price environment, meaning limited cash available for new investments and management focus on trying to run existing operations as efficiently as possible.
It’s more likely that private Indian companies will seek to get into domestic coal mining, with several expected to bid for blocks.
These private companies, which could include GVK and Adani Group have experience in mining, as well access to newer technologies and expertise.
If they do enter the market, they will no doubt be more efficient that Coal India, once again putting pressure on the state giant to lift its game.
India aims to double annual coal output to 1.5 billion tonnes by 2020, an ambitious target that if achieved would probably eliminate much of the need for imported fuel, especially thermal coal for power generation.
It’s still very early days in getting anywhere close to that target, and it will be worth watching to see if Coal India does make efficiency and output gains, if the government can manage to cut red and green tape and how much private companies are willing to invest to get a foothold in the industry.
The main point is that the risks to India’s domestic coal output are no longer to the downside. If anything, the risk is now that production will surprise on the upside, maybe not immediately but certainly over the next few years.
This represents a further blow to export-orientated coal miners in Australia, Indonesia and South Africa, as the last thing they want to see is an early peak in Indian imports. Reuters
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