Home >Home-page >NTPC likely to revise coal sourcing strategy

State-run NTPC Ltd, India’s biggest power generation utility, may be changing its strategy on securing critical fuel supplies by seeking long-term coal supply agreements instead of trying to buy overseas mines outright.

The rethink comes against the backdrop of NTPC’s failure to secure equity in coal mines in countries such as Australia, Indonesia and South Africa.

The strategy, as spelt out in the utility’s vision document, NTPC Corporate Plan 2032, was drawn up by consulting firm Bain and Co. India Pvt. Ltd.

“Bain’s advice to us is based on the principle that since coal is not NTPC’s core business, it doesn’t make sense to acquire overseas coal assets," an NTPC executive aware of the revised strategy said on condition of anonymity. “Instead, they have advised us to enter into long-term coal supplies based on the Japanese model, where 100% coal is imported without holding any equity stakes overseas."

NTPC will also try to take small stakes in overseas mines to ensure supply security, based on Bain’s advice, said the official cited above.

Another NTPC executive aware of the strategy said, “The corporate plan has been approved by our board. Normally, we will not try out any acquisition targets." He declined to be named.

According to Japan’s ministry of economy, trade and industry, domestic coal accounts for just 0.7% of local consumption, forcing the country to import 180 million tonnes (mt) of coal a year through long-term supply agreements.

The NTPC plan has similarities with the Tata group’s strategy to acquire strategic stakes in overseas mining companies to secure supplies.

Tata Power Co. Ltd owns a 30% stake each in three Indonesian coal mining companies—PT Kaltim Prima Coal, PT Bumi Resources and PT Arutmin Indonesia. Tata Steel Ltd has a 27.1% holding in Australia’s Riversdale Mining Ltd, which is at the centre of an acquisition bid by Rio Tinto Plc.

Coal is critical for NTPC as at least 80% of its installed capacity runs on the fuel. The firm, which has a power generation capacity of 33,194MW, plans to increase its installed capacity to 75,000MW by 2017 and to 128,000MW by 2032. The utility needs 160 mt of coal in fiscal 2012, of which around 16 mt will be imported.

Operations are yet to start at a number of captive coal mines that the Indian government allocated to various firms till date. Only 26 captive blocks of 208 are in operation in the country.

A spokesperson for Bain and Co. declined to comment.

“If we get coal at a viable price, which makes my cost of power saleable, then I am open to any mode such as long-term overseas coal supplies, acquiring a mine or a stake in it or through (state-run) Coal India Ltd (CIL)," NTPC chairman and managing director Arup Roy Choudhury said.

“A corporate plan is a vision statement for an organization for the future for macromanagement," he said. “The micromanagement is to be within those parameters from time to time by the management because it is a dynamic environment."

CIL, which has an 82% share of the country’s coal production, has been unable to keep pace with rising demand. It produced 431.27 mt in 2009-10 against a target of 435 mt. The company is to supply NTPC with 144 mt in the next fiscal year.

NTPC has already placed orders for 12 mt of imported coal for the next fiscal.

The new strategy may leave companies exposed to supply risks, said Dipesh Dipu, director (consulting, energy and resources, mining), Deloitte Touche Tohmatsu India Pvt. Ltd. The earlier overseas acquisition model was aimed at ensuring supplies and curbing price volatility, he said.

“Miners have of late moved from annual contracts to quarterly and now are seen to further shift to monthly contracts. Many have tilted in favour of larger quantum of sales through spot markets," he said. “These developments have seen large fluctuations in pricing. These risks may adversely affect the generation companies."

According to the Economic Survey 2010-11, growth in India’s power generation slowed to 4.5% between April and December from an expansion of 6.17% in the same period in the previous year, with the shortage of coal being one reason for this.

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