coal insights, may 2016

4 Coal Insights, May 2016

COnTEnTs

22 Steam coal offers steady in May 24 Coking coal offers fall in May 26 India’s coal production at 638 mt in

FY16, misses target 28 Is CIL looking to cut output on low power

sector off-take? 30 India adds 23,976.6 MW generation

capacity in FY16 32 CIL’s special forward and exclusive

e-auctions to offer 79.61 mt 36 Cement cos see concrete turnaround

prospects next year 42 NCL banking on 3 projects to surge

output next year 43 Corporate update 45 MCL uses GPS monitoring to reach

potable water 47 GMBsees5%riseincargotraffic

handling in FY17 48 Coal handling by major ports up 12% in

April 2016 49 Indian Railways FY16 coal handling

inches up 1.1% 50 Smoking a common cause of smoulderingfire

59 “Despite challenges, we see a bright future”

60 US power sector coal consumption estimated to fall 8% in 2016

62 E-auction data 64 Port data 57 | IN FoCuS

Creative Engineers focusing on coal industryIndustrial pump manufacturers bank on coal sector, expects revival from 2017.

28 | FEAtuREIs CIL looking to cut output on low power sector offtake?The miner is facing difficulty in handling pithead vendible stocks of 55 million tons.

38 | SPECIAL FEAtuREWill government impose cess on pet coke?Coal India is believed to be pushing for a green cess and even a ban on its usage.

16 | INtERVIEWthe world cannot wish coal away from energy matrix’Investing in HELE will be more rewarding than subsidising renewables, says Benjamin Sporton, CEO, WCA.

6 | CoVER StoRY‘Wait, and you’ll see another mass de-allocation’The allottees fear another de-allocation as captive blocks fail to start production.

Corrigendum

The Issue numbers for Coal Insights’ March and April editions of 2016 were erroneously printed as Issue IX and Issue X, respectively, instead of Issue VIII (for March 2016) and Issue IX (for April 2016). The error is deeply regretted.


COvER sTORy

Captive chaos continues

`Wait, and you’ll see another mass de-allocation’Coal Insights Bureau

”The intention is not to be disruptive to the government. The intention is only (to) introduce corrections in whatever is happened…if you shut a door you have to open a window.”

Vinod Rai, former CAG, Government of India1

Coal Insights, May 2016 7

COvER sTORy

One fine morning about 4 years ago, the country’s coal sector woke up with a jolt to learn how the

captive coal block holders had plundered national resources. Taking advantage of the government’s lenient norms, they denied the national exchequer of massive “notional” wealth of `187,000 crore. If there were doubts with the numbers, the subsequent de-allocation and e-auction of blocks put them to rest, fetching in `340,000 crore, nearly double the CAG estimate, that too from only a handful of blocks.

Cut to May 2016, the windfall gain for the government, well, has remained as “notional” as it was at the time of the CAG revelation, with only a fraction of the estimated proceeds actually changing hands (in the form of earnest money deposits), but production from these blocks has sharply come down from about 62.4 million tons (mt) per annum before the auction to 40.9 mt now, thanks to a series of litigations filed by aggrieved allottees.

Now, the trigger behind the CAG report was the lack of production from captive blocks. Looking at the present output scenario, doesn’t it deem fit for yet another round of de-allocation and re-allocation (which may, in the process, earn some more notional gains for the exchequer)? In fact, many of the allocattees, present and past, are waiting for that, precisely.

But wait! It’s not only about not getting coal from the blocks; there is much more at stake now. While the government hasn’t got much of its notional money, the end-user industries have lost much of their real investments.

Huge amounts of money are locked in projects which were to run on coal extracted from those blocks. And the banks that lent to these projects have lost much of, again, real credit. And the economic growth has lost much of its sheen, real again, courtesy loss of investor confidence.

In the midst of it all, coal deposits lying in these blocks are being plundered by local miscreants…finally, real resource going back to its real owners…!

Vanishing outputThe production of coal from captive coal mines2 during 2015-16 (April-March), stood at 40.98 mt, nearly 34.3 percent lower compared to 62.40 mt produced in the same period of the previous fiscal, according to provisional data available with Coal Insights. In absolute terms, this indicated a drop of nearly 22 mt of coal production from captive sources.

The target for coal production from the captive blocks in 2015-16 was 94 mt, of which only 43.59 percent was achieved during the year. It is understood that the target was not met as a number of mines that were auctioned at the beginning of 2015 are yet to start production.

However, in March 2016, the last month of 2015-16, production from the captive blocks increased 11.49 percent to 4.17 mt as against 3.74 mt in February 2016. On a year-on-year basis, coal production from the captive blocks was still down 4.35 percent in March 2016 from 4.36 mt recorded in the same month last year (ie, March 2015).

Earlier, captive coal production saw a steady rise from 43.07 mt in 2010-11 to 62.4 mt in 2014-15, registering a positive growth in output each year. Initially, there was only a slight increase in yearly output from this source, but a major jump of almost 10 mt

was witnessed in 2014-15 versus the previous year. This spurt was attributed to the last- ditch effort by previous block allocattees to exploit the resources before handing over the same to new block owners by end of March 2015.

Starting 2015-16, ie, April 2015, all these blocks presented a precarious production record. Fresh output was hard to come by due to the hurdles put in the way of handing over land and the mine to the new allottees. The major hurdle is the court cases filed by the previous owners, who have sought court intervention against the government orders.

Factors behindThere are about 63 blocks which have been allotted through e-auction so far. Of this, 38 blocks have been given to public sector units and the remaining 25 to the private sector. The auctioned blocks include 37 Schedule II mines which were earlier operational or on the verge of starting operation.

Mining leases have been granted to 31 Schedule II coal mines and mine opening permission granted to 12 blocks. Of these, 10 blocks have actually started production.

Only four private companies have started mining so far. Many other blocks are mired in land and forest and environmental clearance hurdles.

LitigationsAs stated before, the major factor hindering the commencement of operations in

1 Source: http://timesofindia.indiatimes.com/india/Full-text-of-Vinod-Rais-interview-with-Arnab-Goswami/articleshow/42286309.cms2 Captive coal blocks include those allotted via e-auction in 2015 and also that of Tata Steel and the blocks in operation in Meghalaya.

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2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Production Target Growth

Captive coal production, target (mt) and growth (%)


Excerpts:

To start with, how would you describe the role played by the World Coal Association (WCA) in the global coal industry?

The World Coal Association is the global industry body for coal, formed of major international coal producers and stakeholders.

We work to demonstrate and gain acceptance for the fundamental role coal and low-emission coal technologies play in achieving a sustainable and lower carbon energy future.

What is the WCA’s latest estimate of the world coal reserves? How long can these reserves sustain at the current rate of usage and growth in demand?

According to the 2015 BP Statistical Review of Energy, the world coal reserves are up to a total of 891,531 million tons. At present, this provides a reserve to production ratio of 110 years.

What are WCA’s estimates and projections for the use of coal vis-à-vis other fossil fuels in the world for 2030?

The WCA – and independent sources

– project coal to continue to provide a significant share of global energy for the coming decades.

In 2030, for instance, the International Energy Agency (IEA) forecasts energy demand in the power sector will equal 6,491 million tons of oil equivalent (mtoe), of which 2,558 mtoe (39 percent) will be provided by coal.

Comparatively, natural gas will provide 1,437 mtoe (22 percent) or renewables (other than bio-energy or hydro) will provide just 503 mtoe (7.7 percent).

InTERvIEw

Though growth is likely to be less pronounced in the OECD economies, coal demand is expected to rise with the IEA projecting an almost 11 percent growth in world coal demand for the power sector by 2040. Southeast Asia is projected to become an increasingly important economic centre

and is expected to drive demand for the fuel. Coal is and will remain the logical, low-cost, base load power choice for many developing countries, particularly Asian economies, since it is the lowest-cost fuel option for generating power, World Coal Association (WCA) CEO Benjamin Sporton tells Arindam Bandopadhyaya in a free-wheeling interview.

The World can’t wish coal away from energy matrix”

“


Rakesh Dubey

After having raised output by a record 8.55 percent in 2015-16, Coal India Ltd (CIL) appears to be facing

difficulties in selling the material due to poor demand from power sector consumers and a rise in pithead vendible stocks.

The company, it seems, is now looking to reduce production to manage inventories and debt levels, industry sources said, quoting company officials.

Coal Insights was unable to verify from CIL whether the company is looking to curtail production but an official said the current pithead vendible stocks are running at about 55 million tons (mt).

Together with coal stocks at power plants of around 34.25 mt (2.14 mt of imported coal) lying at nearly 100 Central Electricity Authority (CEA)-monitored power plants, the stocks of coal are currently hovering around 90 million tons (mt).

“CIL is facing difficulties in handling the pithead vendible coal stocks as there is always a threat of this inventory catching fire due to the immense summer heat. It is also unable to reduce the stocks because not only demand from the power sector is not rising much, because the power plants already have sufficient stocks of the fuel, sectors like cement have curtailed their purchases of coal through the company,” sources said.

Asked why CIL is not supplying more than the asked quantity of coal to power plants, the sources said, “In that case, outstanding payments will become an issue.”

According to the sources, CIL officials feel not only is there lower-than-expected demand level from the power sector, the company is also unable to supply excess fuel or more than the required quantity to power plants because they have to take care that the outstanding remains within a manageable limit.

“Generation companies like WBPDCL and DVC do not have funds to take delivery of excess quantities of coal. The situation is more or less similar in other generation companies,” sources said, citing official sources.

Sources said, “While the company’s officials want to curtail production, they are not getting the green signal from the Ministry of Coal.”

There are also indications that, in view of piling up of stocks, the company is not only looking at curtailing production, a few officials also believe CIL should be allowed to reduce the government-fixed production target of 598 mt for the year 2016-17.

“Company officials feel that if the current production rate is maintained and reaches somewhere near the target of 598 mt for the year, it may end up having huge stocks that might affect its cash flows and net worth,” sources said.

In fact, CIL’s net worth declined gradually during the past three years after touching a peak of `48,461 crore in 2012-13. The net worth in 2014-15 was pegged at `40,343 crore and is likely to soften a bit in 2015-16 as well.

CIL has already distributed huge amounts (`53,500 crore) of money as dividend to shareholders (79 percent to the government) during the past 3 financial years.

In fact, the company’s total dividend outgo in 2013-14 was `19,600 crore, which fell to `13,078 crore in 2014-15, but jumped up again to `20,830 crore in 2015-16.

A few experts believe that if the company continues to dole out cash in the form of dividend in the way it did during the past 3 years, it might not be left with enough money to fund its ambitious plan to achieve 1 billion tons production target by 2019-20.

It is not only the outflow of cash through dividend that might affect CIL’s ambitious production growth, the company is also likely to remain under pressure as it may have to

Is CIL looking to cut output on low power sector off-take?

give at least 15-20 percent hike in salaries to its employees from July 1, 2016.

Soft crude prices may have helped CIL save `2,500 cr

A soft trend in crude oil prices in the international markets, that had helped India gradually reduce diesel prices after August 2014, might have aided CIL, India’s leading coal miner, in saving as much as `2,500 crore in expenditure on contractors mining costs during the past nearly 2 years, according to an analysis by Coal insights.

The price of diesel in Kolkata or the eastern region, where much of CIL’s mines are located, has come down to `52.67 per litre in May 2016 from a high of `63.81 per litre prevailing in August 2014, according to data available from Indian Oil Corporation’s website.

The estimate on savings in cost is calculated based on the assumption that a `1 fall in diesel contributes to a saving of `120 crore for the coal miner in terms of re-imbursement of mining cost to contractors.

Incidentally, the former Chairman of CIL, S Narsing Rao, in September 2013, while talking to reporters on the sidelines of the company’s annual general meeting, had estimated that for each `1 hike in diesel prices, the impact on production cost is `120 crore.

His comments had come at a time when diesel prices were rising in view of the rise in crude oil prices in international markets and the company was facing difficulties in bearing this cost as diesel is supplied by the company to all its contract miners.

“Majority of overburden (OB) removal and production through the open cast route comes through contract miners and the decline in diesel prices has helped reduce expenditure on account of extraction through contract miners,” an official from CIL had said.

The saving must have come, as far as diesel prices are concerned, also on account of the company’s mining operations through departmental means.

CIL’s coal production in 2014-15 stood at around 494 million tons (mt) as compared to around 462 mt in 2013-14. The production had increased to around 536 mt in 2015-16.

fEATuRE


sPECIAL fEATuRE

Will government impose cess on pet coke?

Rakesh Dubey

Severely impacted by the lack of desire by cement-makers to lift high grades of coals against their linkages, Coal

India Ltd (CIL) is believed to be pushing for the imposition of a clean environment cess on usage of petroleum coke and possibly even a ban on its usage, a number of industry sources told Coal Insights.

Not only the clean environment cess of `400 per ton, the coal behemoth is also believed to be arguing for imposition of some additional taxes on grounds of higher pollution that is caused by pet coke because of its extremely higher or even up to 9 percent sulphur content, they said.

The company, according to industry sources, is also arguing for the imposition of a complete ban on usage of pet coke in the country because of high sulphur content, which might severely impact a number of domestic refiners who produce pet coke.

The cess on coal, which was earlier called clean energy cess, was imposed for

the first time at `50 per ton in February 2010 in the Union Budget proposals for 2011-12 to reduce the negative environment consequences and increased pollution levels associated with industrialisation and urbanisation.

However, it was increased to ̀ 100 per ton in the Union Budget, 2014-15 and further to `200 per ton in Budget proposals for 2015-16 and thereafter to `400 per ton in the Union Budget, 2016-17.

However, petroleum coke was kept out of the purview of cess, which not only took away CIL’s price determination power as to that extent (`400 per ton) it could not increase price of its coal, but also prompted many a user of domestic steam coal to switch to pet coke.

A senior CIL official too indicated, but did not confirm, that the coal behemoth is trying to impress the Ministry of Coal to impose such a clean environment cess on pet coke.

“We are finding it extremely difficult to push sales of higher grades of coal that were

earmarked for usage by the cement sector as they have started using petroleum coke which they are finding more economical to use,” the CIL official said.

However, industry sources claimed that there has been serious follow-up by CIL to ensure that not only the cess is imposed on petroleum coke, but there is ban on its usage as well.

“It is happening through the Ministry of Coal. CIL is trying to convince the ministry to take their proposal forward with the Ministry of Finance and I understand, the imposition of `400 per ton cess on pet coke is just a matter of time,” they claimed.

CIL is believed to be arguing against pet coke on two grounds.

First is that consumers have practically stopped using their higher grades of domestic coal because they are finding pet coke to be much cheaper on per kcal basis especially after the severe decline in pet coke prices in international markets, particularly from November 2015 onwards. This has led to a scenario wherein the company is unable to sell its higher grades.

Pet coke comes with a gross calorific value (GCV) of around 7,500 Kcal/kg as compared to a GCV ranging between 5,801 and 7,000 Kcal/kg for CIL’s grades ranging between G5 and G2.

The second argument is that there is a cess on coal due to environmental aspects,

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coal insights, may 2016

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