Coal In India: Where Do We Go From Here?

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This is part 2 of a special report on India’s new coal reality. Check out part 1 to see how a recent court ruling has reset the industrial playing field there.

On August 25, India’s Supreme Court ruled that coal blocks granted to industry, some as many as 20 years ago, were allotted by “ad-hoc” means, adding that “common good and public interest had suffered heavily in the unfair distribution of the national wealth – coal.”

So now what? There are conflicting predictions coming in from industry and analysts. Some in India felt the ruling would cause serious supply disruptions and heighten the power crisis, so also negatively impact the Indian economy.

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A report in The Economic Times quoted the President of the Confederation of Indian Industry (CII) Ajay Shriram as saying the decision was likely to adversely impact the domestic coal supply in the country and would erode investor confidence. Almost all the major industry representative bodies were unanimous that the ruling would negatively impact the Indian business environment.

Pradeep Tandon, Executive Vice President of Jindal Steel, one of the affected companies, lamented that it would affect production costs and the economy in the long run.

It is a well-known fact that coal is the mainstay of Indian electricity generation, with about 2/3s of the power generated driven by this fuel. Some also fear that just when there were initial signs of a recovery, the ruling would push the Indian economy back to its lethargic state of 2 years ago. Others said the dependence on coal imports would increase.

Questions are already being raised about the sanctity of government investment policies. First, the telecom case, now coal. Will foreign investors continue to take part in the “India Growing” story, is a question being asked in corporate circles the day after. Why should private players, alone, have to bear the brunt of improper government decisions, was another question doing the rounds.

In one go, key sectors including power, steel and mining will be impacted. CII figures say about 80 million tons of coal is being imported to meet the power sector’s requirements at present. Many feel this could go up at least 3-fold.

Leading rating agency Crisil said the players which have operational coal blocks may witness a sharp fall in profitability post 2014-15 as they would have to substitute captive coal with imported coal, which is about 4 times more expensive.

But there are others who are trying to allay such fears by pointing to the judgment, itself. The court has allowed a 6-month period to continue mining, after which the mines will be taken over by the government-owned Coal India Ltd. Then, it has also asked the government to reallocate the blocks if it so chooses.

Others say the moment should be seized upon by the government to review the coal sector and usher in a new reforms policy for this sector. This would also mean bringing in a transparent rules-based system in the allocation of coal.

The situation is such that as per a report in LiveMint half of India’s thermal power stations had less than a week’s supply of coal on hand as of Sept 24, the lowest since mid-2012.

Some legal experts felt the government could consider issuing an ordinance to overcome legal hurdles that may arise out of the apex court’s judgment. Others hoped the government had some alternate plan ready in anticipation of the legal order. Coming on a day when the Indian space program tasted sweet success by placing a satellite in Martian orbit, news of the coal mine de-allocation came as a real dampener.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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