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India’s mass cancellation of mining licenses spurs debate

The mass cancellation of coal licences has sparked off an uproar in India Inc.

Many captains of industry have said it could cause serious supply disruptions and exacerbate India’s on-going power crisis. Worse, the economy would have to pay a heavy price for the Supreme Court’s decision to cancel coal blocks and get them auctioned by the government.

“The authority of the government is at stake here. The damage is unlikely to be confined to only coal blocks. Any administrative decision taken in the future in the mining sector would be fraught with uncertainity, and would fail to inspire confidence and carry credibility,” said a senior corporate official.

The Supreme Court, India’s highest court, recently ruled that allocations of 218 coal blocks for mining were all illegal except for four, and cancelled the whole lot. The total investment at stake: $32.55 billion (Rs 2,000 billion). Coal producers could also face penalties of upto $3 billion.India's mass cancellation of mining licenses spurs debate

Amar Ambani at broking firm IIFL said the focus would now shift to investor uncertainty about investing in the Indian mining industry. The impact of the verdict would be highest on JSPL and Hindalco in the metals space, he added.

Others lamented that the economy, which was just about showing the first signs of a spring bloom after two years of deep frost, could soon go into reverse mode.

Vikas Khemani, from broking firm Edelweiss Securities, said, “Some 40 producing coal blocks are set to pay a penalty. All producing coal blocks are to be turned over to Coal India within the next six months. The judgement is silent on possible auction of the coal blocks and the onus is on the government to decide the future course of action. Mine owners’ woes would continue.”

Analysts added that bidders in the coal mine auction would be reluctant to borrow money from banks to start mining till the issue was finally resolved, thus causing further delays and cost escalation.

The court has allowed these cancelled blocks to continue extracting coal till March 31, 2015. The central government and Coal India Limited (CIL) are expected to come out with a policy for the new situation.

The Confederation of Indian Industry (CII) president Ajay Sharma said the decision was likely to adversely impact domestic coal supplies in the country and also erode investor confidence.

“Confidence needs to be restored and quickly. The government needs to ensure a better, transparent tender process for the leases, which would be an important first step,” said an analyst.

An official at Khaitan & Co, a law firm, added: “The manner in which coal block allocations have been made clearly leaves much to be desired, and speaks volumes about the sanctity, transparency and fairness of the process, or rather the lack thereof.”

Stating that the implication of the apex court’s judgment and the order would be felt for some time, the legal luminary said coal block allottees would need to assess the possibility of disputes arising out of contracts entered into between them and the relevant counterparties.

India's mass cancellation of mining licenses spurs debate

Given the fact that there has been a lack of confidence and a great deal of public mistrust in the mining lease allocation process, the official said the court’s decision would undermine investor confidence.

Arguing that a robust regime for effective private sector participation in coal mining was important to ensure efficient exploitation of the precious natural resource for maximum common good, the official added that the cancellation of all, but four coal block allocations however, presented an opportunity to rid the important sector of uncertainties.

Similarly, Barclays has said in a note to its clients: “Despite the near term negatives, especially for JSPL and Hindalco, the judgment offers the government an opportunity to introduce a transparent and sustainable mechanism for minerals allocation in India.”

Chirag Shah at Barclays said investors would now look forward to the timeline, bidding amounts and other details on coal block auctions. “We view the SC ruling as an opportunity for the government to implement an image make-over of the mining sector in India,” he said.

Negative impact

Many industrialists have however, maintained that the apex court’s decision would have a negative impact on the economy. India’s population, including its industries, are largely dependent on thermal power, so any problems with the coal supply means an indirect effect on its economic growth.

“It is highly unlikely that the allocation process, through competitive bidding or any other process, would be complete by FYE15. In this situation, CIL would take things forward. CIL itself is struggling to achieve its own coal production targets. In FY14, CIL achieved 95.96% of its production target and achieved 2.3% growth over FY13 production. To achieve the captive coal mines’ FY14 coal production target, CIL would have to improve its production performance by 8.41%, which does not look too feasible,” said Devendra Kumar Pant, Chief Economist at ratings firm, India Ratings.

India's mass cancellation of mining licenses spurs debate

Some experts have even predicted that coal imports would go up four times from the current levels. They added that the government would need to expedite reallocating the cancelled producing blocks, so that production was not affected in the short term.

Crisil research has said that players who have operational coal blocks would witness a sharp decline in profitability post 2014-15, as they would
have to substitute captive coal with imported coal which is about four times more expensive.

According to CII, acute fuel shortages were already affecting the power sector, and currently close to 80 million tonnes of coal was being imported.

Experts added that the decision would lead to increased import dependence. The demand supply mismatch has increased India’s dependence on import for coal supplies. In FY14, India imported 171 million tonnes (mt) of coal at $16.41 billion. In FY13, it was 145 mt at $17.01 billion.

In a scenario where CIL is not able to extract coal from captive coal mines of cancelled coal blocks, India’s dependence on imported coal would increase significantly in FY16. Factoring in the increase in coal production in FY14 as compared to FY13 and FY14 and the average imported coal prices, the FY16 coal import bill is likely to widen by $6.22 billion. This would exert pressure and affect macroeconomic stability.

Huge shortage

It may be corporate India’s biggest ironies: even though India sits on an estimated 200 billion odd tonnes of coal reserves, it has been facing a shortage for some years now.

Overall, India is the third largest coal producer in the world, but the shortfalls have forced steel, cement, aluminium and power companies to purchase expensive foreign coal.

It all started because of an artificial shortage created in 1972, when the Coal Nationalisation Act was passed, giving the state owned CIL the sole right to mine coal in the country. But CIL, like any other government owned outfit in the world, failed to keep up with the rising demands of the Indian industry. Its annual production went up from 431.26 million tonnes in 2009-10 to an estimated 462.46 million tonnes in 2013-14.

The outcome of the production lethargy – an annual shortage of 100 million tonnes. To overcome it, some Indian private companies struck deals with foreign mines. That was one of the main reason why previous governments had started allocating `captive’ mines to private companies, with the condition that coal thus mined would not be sold in the open market.

It was the process of allocating such captive mines that the Supreme Court has now found illegal.

Steel and cement companies are slightly better off as compared to the power counterparts, even though there is about 25% shortage of coking coal, something which is scarce in India. A majority of the former have managed to have other accesses to coal, some in the form of a tie up with Coal India, while others have tied up with foreign companies.

The situation is rather grave. Analysts have said that half of India’s thermal power stations have less than a week’s supply of coal on hand, the lowest since mid-2012, and which could run out next week.

India's mass cancellation of mining licenses spurs debate

With the new government under Prime Minister Narendra Modi having taken over in May this year, plans for industrial revival were chalked up under the `Make In India’ programme, which ironically was officially unveiled by Modi on Thursday, September 25, a day after the Supreme Court ruling.

The new government’s goal is to increase coal production to one billion tonnes a year by 2019. To achieve this, production would have to grow by more than 18% annually, something not seen since the last decade.

India has also missed its target to increase coal output to 680 million tonnes by the end of the 11th five year plan (2007-12). China, its neighbour, on the other hand, produces roughly 3.5 billion tonnes a year.

Analysts have said that the 1 billion tonnes a year coal production plan may as well be still born, if the government does not sort out the coal mess and ensure 24/7 power supply to industries. The target right now looks unachievable, especially since even at its peak, India produces only 160 gigawatt of electricity out of its total installed capacity of 250 GW.

By the government’s own reckoning, the country lost about 15 billion units of electricity due to non availability of coal in the last two fiscal years. A report by industry body FICCI has said that power problems in 2011-12 had caused a loss of $64 billion to the economy.

The situation appears to be only worsening. With the economy picking up, and coupled with the court ruling, the fuel crisis is worsening. In 2008, for example, power plants had, on an average, coal stocks of 10 days at the beginning of each month. By 2014, the average was down to six days as against laid down guidelines of thermal power plants needing to have coal stocks for 15 to 30 days.

The Central Electricity Authority released data earlier on coal supplies for September 10 that showed that only 12 of 100 plants around the country had stocks for 15 days, and 64 plants that make up more than 40 per cent of the country’s installed capacity had less than a week’s reserves.

Raj

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