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Indian Coal Industry
Credit Analysis & Research Limited, Oct 2008, Pages: 93
Coal demand to grow at a CAGR of 7.58% in the next two years
India is the third-largest producer and consumer of coal in the world. With proven reserves of 257.38 billion (Bn) tonnes, coal is one of the most abundant sources of energy in the country. In 2007, coal accounted for 51 percent of the primary energy consumed in the country.
The coal industry is a highly-regulated industry which gives it a monopolistic character. Only government-owned/managed/controlled companies are eligible to mine and trade coal without the restriction of captive consumption. Coal India Limited (CIL) and Singareni Collieries Company Limited (SCCL) account for nearly 92 percent of the total coal produced in the country.
The industry is also characterized by inelastic demand. The technologies prevailing in the major coal-consuming sectors like power, steel and cement are coal-based, thus rendering the substitutability of coal as a fuel in these industries difficult at least in the near future.
Coal mining is fraught with high risk, making safety issues critical for the industry. In addition, as mining has tremendous impact on the environment, clearances need to be obtained before mining can be initiated.
Though India has the fourth-largest proven coal reserves in the world, Indian coal is of poor quality. Nearly 83 percent of the Indian coal is of non-coking variety with high ash content. Of the 456.4 million (Mn) tonnes of coal produced in FY08; power, steel and cement sectors accounted for 75 percent, 4 percent and 3 percent, of the off take respectively. The domestic off take by the power and cement sectors have grown at a CAGR of 6.79 percent and 4.03 percent, respectively during the last five years while that by the steel sector has seen a decline of 2.03 percent during the last five years.
The off take of coal by different sectors is governed by coal distribution policy. In October 2007, the new coal distribution policy was introduced. As per this policy, 100 percent requirement of sectors like power (non-captive), fertilizer, defence and railways will be met at pre-determined prices. For other sectors, 75 percent of the requirement will be met at the pre-determined prices. Companies having an annual requirement of more than 4,200 tonnes will need to enter into Fuel Supply
Agreements (FSAs) with CIL/subsidiary companies while others will need to enter into FSA with agencies as notified by the state government. E-auction of coal has been reintroduced for the benefit of small consumers who cannot enter into long-term contract due to small requirements.
In FY08, India imported approximately 50 Mn tonnes of coal, of which coking coal constituted 57 percent. The major source of imported coking coal is Australia while for non coking coal Indonesia is the dominant source. The close proximity of Indonesia with India compared to other source countries gives Indonesian coal a freight advantage over others. India also exports a miniscule amount of coal to countries like Nepal, Bangladesh and Bhutan.
Demand Growth
As per the Expert Committee on Road Map for Coal Sector Reforms, a shortfall of 100 Mn tonnes of thermal coal is expected in the country by the end of FY12. To meet this demand-supply gap, the Government is looking at various alternatives e.g. FDI, acquisition of overseas coal block, captive mining, faster project approvals, better technology etc.
An area which calls for major improvement is coal logistics, in both rail and port. At present, both rail and port infrastructure are severely stretched, with the average waiting time at the Indian ports reaching 4.12 days and 4.89 days in FY07 for non-coking and coking coal, respectively. Coal beneficiation is being encouraged to release the already stretched railway capacities.
We expect the coal demand in the country to increase to 574 Mn tonnes by FY10, growing at a CAGR of 7.58 percent in the next two years.
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