<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>On 17 August, Coal India (CIL) de-throned Reliance Industries (RIL) as India's most valuable company by market capitalisation. Though the reign at the top was to last only a few days — on 24 August, CIL has slipped to number three, behind RIL and ONGC — it was a pointer to how bullish investors had become about the black mineral.<br><br>Actually, the interest in coal has been rising for the past few years. Some of corporate India's biggest names have been on a shopping spree for coal assets around the world. Last year, Adani Enterprises spent a whopping $2.7 billion to pick up coal blocks in Australia's Linc Energy. Tata Power, Reliance Power, Lanco Infratech, the Jindal siblings Sajjan and Naveen, Essar and others picked up coal mines in Indonesia, Australia, South Africa and Mozambique. Collectively, they have spent about $8 billion over the past four years.<br><br>Meanwhile, around the world, coal prices — both thermal as well as coking coal — have been fluctuating. After peaking in 2008 during the great commodity bubble, coal prices slumped, along with those of most commodities. But after a steep drop in early 2009, prices started hardening again in 2010 and by early this year, coal prices were touching or coming close to their 2008 highs. Thermal coal prices almost doubled while coking coal prices went up even faster.<br><br>Meanwhile, stockmarket investors in India have also taken note of coal. Till CIL listed last year, avenues for investing in coal were limited for equity investors in India. But in 2010, when the company went for its initial public offering (IPO), it raised about Rs 15,000 crore and its offer was over-subscribed 15 times, showing the pent-up demand. CIL, being an averagely efficient public sector company, had nothing much to recommend but for one thing — it had the virtual monopoly for coal mining for commercial purposes in India. It had been allocated coal mines with estimated reserves of 65 billion tonnes of thermal coal. More importantly, the government of India allows only CIL to mine and sell coal — all other companies with coal mines allocated to them have to use the mineral for captive purposes only.<br><br>According to most analysts, coal demand and, hence, coal prices are only going to rise because the existing demand-supply mismatch is only going to get worse. According to the BP Statistical Review of World Energy 2011, global coal production grew 6.3 per cent between 2009 and 2010, while consumption rose by 7.6 per cent. In India too, the rapidly rising demand is seeing an increasing dependence on imports. Coal imports this year are estimated to be a whopping 84 million tonnes, a figure likely to double within two years. According to data available with the commerce ministry, as much as $8,183.38 million was shelled out in 2009-10 for importing coal. In 2011, it has already reached $6,993.69 million.<br><br><img src="/businessworld/system/files/coal_graphic_580x351.jpg" style="vertical-align: middle; margin: 8px;" width="580" height="351"><br><br>Even analysts are exhorting investors to put money in coal, expecting the next great bull-run to happen in this commodity. The US-based investment research firm Money Morning recently brought out a report The Commodity Boom of 2011: Coal is the New Gold. It was not the only one. (In 2010, shortly after CIL's IPO, the Indian minister in charge of the coal ministry made a statement asking investors to stay with CIL despite its soaring stock prices, because "Coal India is Gold India".)<br><br>But coal is one of the more abundant minerals in the world — proven reserves are estimated to be 860 billion tonnes. So why is there so much of a rush to secure supplies suddenly?<br><br>The answer lies in three factors — the soaring power demand in India and China, the growing worldwide steel production, and finally, the increasingly stringent environment regulations. Between them, they are ensuring that demand for coal rapidly outstrips supplies.<br><br><strong></strong><img src="/businessworld/system/files/graphic1_580x417.jpg" style="vertical-align: middle; margin: 8px;" width="580" height="417"><br><strong><br>The Great Power Game</strong><br>As China and India set scorching growth rates, the demand for electricity in these two countries is also rising dramatically. In turn, that is fuelling the massive appetite for thermal coal — the kind that is required for power plants. <br><br><strong></strong>break-page-break<br>Despite an increase in interest to find viable alternative fuels for electricity generation — solar, nuclear, wind, wave or even the relatively clean fossil fuel gas — there is no substitute to coal as yet, says James O'Connell, managing editor at global energy information company Platts. He says that for years, China was building one medium-sized coal fired power plant every week for several years as it almost doubled its national grid to 1,000 GW (1 million MW). India's is 177 GW.<br><br>The World Coal Association says coal-fired plants generate 41 per cent of all the electricity produced in the world. Coal is the primary fuel for 49 per cent of the power generating capacity in the US (79 per cent), China (79 per cent) and India (69 per cent).<br><br><img src="/businessworld/system/files/graphic1_125x323.jpg" style="float: right; margin: 8px;" width="125" height="323">Till 2006, the global coal market saw some sort of equilibrium between demand and supply because China used to actually export coal. From 2007 onwards, its own rising demand for coal in its power plants saw the Middle Kingdom enter the global markets as a buyer aggressively. In 2009, China became a bigger consumer of electricity than the US, according to the International Energy Association (IEA). It also became one of the biggest importers of coal.<br><br>India, though far behind the two leaders, is also seeing an exponential rise in its power generation capacity. Over the next four years, power generation in India is projected to rise from the current 177 GW to 300 GW. Of this, roughly 70 per cent of the new generating capacity will come from coal-fired plants. A policy brief by Teri (The Energy and Research Institute) on coal says each 2,000 MW of power generated through coal needs 10 million tonnes of that fuel annually. Add it up and you get an additional demand for 424 million tonnes of coal annually.<br><br>Tata Power, Reliance Power, Lanco Infratech and the Adanis are setting up mega power plants. And most of these depend on coal as fuel, which explains why these companies are also moving to snap up assets overseas.<br><br>Doesn't India have big reserves of thermal coal? And shouldn't domestic production be able to ramp up to meet the power plants being set up? Theoretically, yes. Practically, the answer is no. India's estimated coal reserves are 267 billion tonnes (as on 1 April 2009), of which proven reserves are 105.82 billion. Various other studies, however, peg the extractable reserves in India at about 70 billion tonnes.<br><br>Much of the Indian coal reserves are inferior grade thermal coal, which can be used by power plants but not by the steel industry, which requires a higher grade coking coal.<br><br>Indian power plants get their coal supplies mainly from two sources. The first is CIL, which is mandated to sign a Letter of Assurance (LOA) when a power project is cleared. If the power project actually meets its milestones, the LOA gets converted to a fuel supply agreement.<br><br><img src="/businessworld/system/files/black_gold_580x169.jpg" style="vertical-align: middle; margin: 8px;" width="580" height="169"><br><br>According to Coal India chairman and managing director N.C. Jha, since 2007, CIL has signed LOAs of 600 million tonnes with entrepreneurs planning to set up power plants. While signing the agreements, CIL had made two assumptions. Its coal production, which was 295 million tonnes in 2007, would ramp up. And two, many of the LOAs would not fructify into supply agreements because plants would not be able to meet milestones.<br><br>Unfortunately for Jha, both assumptions have been proved wrong. First, almost all the plants have met their milestones. More importantly, CIL has not been able to ramp up supply. In FY2011, it produced 431.32 million tonnes of coal — a negligible increase over the previous fiscal's 431.26 million tonnes. This is largely because it failed to get environment clearances in time for many of the areas it was allocated coal mines. And as he explains, CIL has not been able to ship even all that it managed to produce due to logistic problems. To move coal to buyers, CIL needs rakes from Indian Railways. The supply of rakes has been lower than CIL's requirement. In essence, a triple whammy for CIL and its buyers.<br><br><img src="/businessworld/system/files/expensive_affair_300x215.jpg" style="margin: 8px; float: left;" width="300" height="215">For private power plants, the other big source of coal is often the captive mines allocated to them under government policy. But again, many companies that have received captive mine licences find that it is easier to get these licences from the coal ministry than to get the environment clearances. There is worse to follow. If the company with a captive mine licence fails to start mining within a set period of time because it fails to get clearances, the mine is taken back by the coal ministry.<br><br>Coal minister Sriprakash Jaiswal says things will get resolved quicker now that there is a new minister for environment and because a group of ministers has been set up to sort out the captive coal mining problem.<br><br>However, power producers realise that imported coal is a hugely expensive option. Domestic thermal coal, which is inferior in quality, costs $30 a tonne. Importing it means paying $130 a tonne, says Ravi Sharma, CEO of Adani Power. That would also increase the cost of power being generated — and the inevitable domino effect on a whole host of industries. Still Adani is better off when it comes to importing coal. Its coal assets are in Queensland, Australia, which is close to the port and can be shipped easily. Moreover, Adani has its own ships which can bring in the coal, and most importantly, it has its own port in Mundra, where it can be downloaded. And its power plants are close to its own port anyway.<br>But that is not an option available to most other power producers, Sharma points out.<br>break-page-break<br><strong>The Steel Story</strong><br>While power plants can still utilise coal of Indian origin, most steel plants find they need to import coal because coking coal is simply not available in India. According to E&Y, of the total proven reserves in India, barely 13 per cent are coking coal reserves.<br><br>On the other hand, demand is going up as Indian steel production ramps up rapidly. Between 2010 and 2014, Indian steel production is estimated to rise by 40 million tonnes. Coal demand by the Indian steel industry has gone up by a similar percentage.<br><br>As one Tata Steel senior executive says wryly: There is no shortage of iron ore assets around the world. But every steel producer is fighting today for coal assets. <br><br><img src="/businessworld/system/files/foreign_buys_150x479.jpg" style="float: right; margin: 8px;" width="150" height="479">The problem, says V.R. Sharma, deputy managing director and CEO (steel business) at Jindal Steel and Power (JSPL), is while demand is going up, there are only a few suppliers in the world, and hardly any assets that can be bought easily. JSPL's current coking coal utilisation is 0.8 million tonnes per annum, which will soon go up to 2 million tonnes per annum, he says. JSPL is putting up a 3.5-million tonne steel plant in Jharkhand, expanding its Chhattisgarh plant from 3 million tonnes to 5 million tonnes, and planning a plant in two phases in Orissa, each phase being 3 million tonnes. As these plants come on-stream, they will require coal — and Sharma is worried because coal prices are rising all the time.<br><br>JSPL has coking coal blocks in Mozambique and South Africa, but will also need imports to reach its 10-million tonne production mark by 2015. "But coking coal prices have already hit $320 per tonne — we do not know what will happen in the future," says JSPL's Sharma.<br><br>"The coking coal business has largely gone to four or five companies — Rio Tinto, BHP, Xstrata, etc." he says. "The mines that are not owned by them are in remote areas from where it is very difficult to transport them."<br><br>Sajjan Jindal's JSW is also facing similar problems, though they have managed to acquire mines in West Virginia and South Africa which are fine for their immediate coking coal requirements. Seshagiri Rao, joint managing director and group CFO, JSW, says: "Coal prices — both thermal and coking — have gone up sharply over the past two years. Coking coal used to be $128 per tonne two years ago; we are paying $310 per tonne currently." <br><br>Since steel is a cyclical business, coking coal demand goes up and down according to steel production. Globally, steel production had fallen in late 2008 and all of 2009 as the global economy went into a slowdown. That resulted in a fall in coal prices too. By 2010, steel production had started climbing again, causing prices of coking coal to rise sharply.<br><br><strong>The Hunt For Assets</strong><br>Given their ever-spiralling requirements, China and India have emerged as the biggest players in the global coal assets business, though they face stiff competition from global mining majors such as Rio Tinto and BHP Billiton.<br><br>Rio Tinto, for instance, operates seven large coal mines in Australia and one in the US. This year, it acquired Riversdale in Mozambique. The company is also looking for more opportunities globally. "We expect strong demand growth in China and India to continue and as our growth projects come online, our geographic sales profile will be further expanded," says a Rio Tinto Energy spokesperson.<br><br>According to Mudit Parashar, partner, Ernst & Young, Chinese companies have spent close to $5.1 billion ($4.7 billion in 2009 and $367 million in 2010) in the past two years on the overseas coal sector. Yanzhou Coal Mining Co.'s merger with Felix Resources in Australia for about $2.5 billion is one of the top global deals made so far. But unlike India, their investments have usually been driven by state-owned companies. The Asian giant is already generating 1,000 GW, and it is building even more power plants. <br><br></p>
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<td><img src="/businessworld/system/files/N-C-JHA_RS_150x150.jpg" style="float: left;" width="150" height="150"></td>
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<td>N.C. JHA, CMD, COAL INDIA "Acquisition by private players will not hit our revenues in the long run." (BW pic by Ritesh Sharma)</td>
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<p>Not that Indian companies are far behind. Tata Power acquired Kati Prima Coal and PT Abutment (Indonesia), while Lanco Infratech acquired Griffin Coal in Australia. Monnet Group acquired PT Sarwa Sembada Karya Bumi for $24 million. Commenting on the deal, Sandeep Jajodia, executive vice-president and managing director, Monnet Group, said: "We plan to mine more coal than required for our captive needs, for selling in the open market which will be a long term source of revenue, as there seems to be good potential for the reserves to go up substantially."<br><br>There are, however, only a few countries where buying coal assets makes sense. Australia is the best because of its big mines, high quality coking coal, and its ‘deal friendly' government. Martin Ferguson, minister for resources and energy, Australia, says, "Australia welcomes foreign investment, including from India."<br><br> He goes on: "According to the most current annual figures, the Foreign Review Investment Board (of Australia) had approved $1.6 billion worth of investment from India across all industry sectors. The majority of this was in mineral exploration and development." He also says that Australia has no plans to restrict export of coals.<br><br>Indonesia used to be a favoured destination for Indian companies till recently, primarily because of its proximity and good quality coal. The Indonesian government has recently put in restrictions on the export of coal, which is worrying several companies that have bought into coal assets in the country. Without being able to import coal from Indonesia to India would mean sitting on expensive assets which cannot be easily utilised. <br><br>Mozambique and South Africa also have decent quality coal mines. But take away these countries and there are problems galore. In the developed nations, getting environment clearance for new coal mines is almost impossible, say analysts. In less developed countries, coal assets are often in remote areas which make it impossible to bring it to India easily.<br>break-page-break<br>It is not just the private players, which are looking at buying assets abroad. CIL is looking to acquire both brownfield (existing mines) as well as greenfield (virgin mining contracts). "This year, we have a budget of almost Rs 6,000 crore to buy assets abroad," says Jha.<br><br>It has not had much luck with brownfield projects yet. Asking prices are too high in most cases, says Jha. CIL's board does not want it to buy assets which will give less than a 12 per cent rate of return. <br><br>Meanwhile, CIL has snapped up two greenfield projects in Mozambique where it is planning to start exploring soon. While it is shopping for assets on its own, it is also one of the partners in International Coal Ventures (ICVL), floated by a consortium of coal buyers to hunt primarily for global coking coal assets. Other partners in ICVL include NTPC, SAIL, NMDC and RTNL. ICVL has a war chest of Rs 10,000 crore, but has not managed any buys so far. It is hoping to get some deals soon. <br><br></p>
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<td style="text-align: center;"><span style="font-size: small; color: rgb(241, 164, 13);"><strong>TYPES OF COAL</strong></span></td>
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<td><strong><span style="color: rgb(255, 0, 0);">THERMAL COAL:</span> Also known as steam coal, it is used predominantly by the power sector and by industries requiring electricity</strong><br><br><strong><span style="color: rgb(255, 0, 0);">COKING COAL: </span>Also called metallurgical coal, it is used by the steel industry both as fuel and a reducing agent in blast furnace</strong></td>
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<p><strong>Environmental Hurdles</strong><br>The big problem that all companies face is not the sheer shortage of coal under the ground, the problems associated with mining it. Coal mining is either surface (open cast) or underground (deep mining).<br><br>Open cast mining can only be practised where the coal deposits are close to the surface. It is considered the more efficient because it allows for better exploitation of the mines and evacuation of the coal.<br><br>In India, the US and Australia, open cast mining forms the bulk of coal mining. In India and Australia, 80 per cent of the coal is mined through the open-cast method, while in the US it is 67 per cent. Open cast also means wide scale destruction of forests.<br><br>In India, the environment ministry has imposed strict conditions such as paying compensation for deforestation. But even that does not satisfy many environmentalists who point out that afforestation in other areas cannot bring back lost biodiversity.<br><br>The bigger problem is that in many cases, the environment ministry has simply marked vast tracts with possible deposits as ‘No Go' areas — in other words, areas where mining cannot be conducted. That, in turn, has led to a running battle with the coal ministry. As of December 2010, almost 203 blocks with 660 million tonnes of annual coal reserves (estimated) were classified as No Go areas.<br><br>Yet, the Indian environment ministry is not the only one taking a hard stance against the effects of mining on the environment. Even its biggest supporters agree that coal is essentially a "dirty" fuel. Its mining causes environmental damage — and so does its use. Coal-fired power plants in general are more polluting than power plants that use gas as fuel.<br><br>Which is why, despite all the coal reserves across the globe, barely a fraction can be actually exploited.<br><br>Yet nobody seriously believes that there will be any substitutes to coal in the short run. And until India and China start moving away from coal as their primary fuel — and there is little evidence that they even want to — as O'Connell of Platt says: Coal is King.</p>
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<td style="text-align: center;"><span style="font-size: small; color: rgb(255, 0, 0);"><strong>INTERVIEW</strong></span><br><span style="font-size: small; color: rgb(255, 0, 0);"><strong>"Importing Coal Will Be Quite Expensive"</strong></span></td>
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<td>SRIPRAKASH JAISWAL, Minister of Coal (BW pic by Ritesh Sharma)</td>
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What is being done to mitigate India's coal shortage?</strong><br>Coal production could have increased as fast as demand if we did not have so many problems. The biggest problem relates to land acquisition. Then there are law and order issues and Naxalism. Of late, forest and environment clearances have become a huge issue. As a result, we were unable to increase coal production. We sustained and maintained production, which in itself is a big achievement. Ever since the group of ministers (GoM) was set up and the leadership in the environment ministry changed, it seems that we will find solutions to these problems. We hope that this year there will be 5-6 per cent growth in coal output. <br><br><strong> Are there any problems with linkages?</strong><br>There is a problem with the railways. We are not getting as many rakes as we need. We get 172 rakes, but need about 190 rakes. There has been an improvement since last year and we hope things will improve further.<br><br><strong> Indian companies are increasingly moving abroad to meet coal needs. Is that a good thing?</strong><br>Our coal production is not enough to fulfil the needs of private companies. The shortfall keeps increasing every year as more players are setting up power plants. If we cannot meet current requirements, how can we meet requirements a year from now? This is why companies have been asked to go abroad for coal properties. They need to do it at a faster pace.<br><br><strong> Any impending threat to energy security?</strong><br>The non-availability of coal can pose a problem for energy security in the country. The imported coal for power production will be expensive, but we will have to bear it. Our first attempt is to exploit coal properties to the hilt. What I requested the GoM is that it will not be an intelligent move to let crores of tonnes of coal remain untouched so as not to destroy forests and hence, increase our dependence on imports. It would be a smarter step to cut down forests for mining with the condition that four times as much afforestation must be carried out to replace the loss.</td>
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<p><br>yashodhara(dot)dasgupta(at)abp(dot)in<br><br>(This story was published in Businessworld Issue Dated 05-09-2011)<br><br></p>