Digging Deeper: Progress, trends and key challenges in coal mining

Progress, trends and key challenges in coal mining

Coal mining has remained a government monopoly since 1973. Some initial steps were taken in 2015 to open the sector, with a few coal mines auctioned to captive end-users. Recently, in a big move, the government gave its approval for private sector participation in the coal mining sector and even conducted the first ever auctions for commercial coal mining in November 2020. This was the first tranche under the Mines and Minerals (Development and Regulation) (MMDR) Act, 1957, and the eleventh tranche of coal mining auctions under the CMSP Act, 2015.

Commercial coal mining aims to bridge the gap between coal demand and supply in the country by bringing in the private sector to increase coal production. Despite being the world’s second-largest coal producer, and the fifth-largest country in terms of coal deposits, India imported 247 million tonnes (mt) of coal in 2019-20 and spent Rs 1.58 trillion as foreign exchange. The auction of coal mines for the sale of coal will create a marketplace with multiple producers that can drive competition and adopt best practices in mining and environment management. Auctions will bring transparency in coal pricing based on market forces.

Reserves and production trends

As of April 1, 2019, India was estimated to have 326 billion tonnes (bt) of geological reserves of coal. The share of proven reserves in the total estimated coal reserves increased from around 41.21 per cent in 2013 to around 47 per cent in 2019. India’s coal reserves are mainly located in the east, with the states of Jharkhand, Odisha, Chhattisgarh and West Bengal accounting for most of the total proven reserves.

Overall, 58 per cent of the total reserves and 73 per cent of proven reserves have a depth of up to 300 metres (other than the Jharia coalfield, where the reserve is estimated to have a depth slab of 0–600 metres). According to the International Energy Agency, at the end of 2017, India stood fifth globally after the US, Russia, Australia and China in terms of proven coal and lignite reserves.

There are some concern areas too. Coal quality varies substantially across India. As compared to other internationally traded coals, Indian coals typically have a lower energy content, higher ash content and lower sulphur content. The bulk of India’s coal reserves are geographically separated from its principal areas of consumption, and require substantial infrastructure networks for transportation from mine sites to generators.

In terms of production, the total cumulative coal production from 1950 up to 2018-19 was 15.85 bt. In 2018-19, India’s total coal production stood at around 730 mt, of which thermal coal accounted for a share of 94 per cent. During April 2019-February 2020, coal production declined by 0.64 per cent from the previous year. The decline in production is largely attributed to heavy rainfall witnessed in coal mining areas in 2019-20, which was around 25 per cent more than the previous year. Production has started showing an upward trend since November 2019. India achieved the highest ever production of around 75 mt in the past five years in January 2020 and 78 mt in February 2020.

In India, 80-90 per cent of domestically produced coal is allocated to end-users through long-term agreements, known as fuel supply agreements, at notified prices. The prices are set in consultation with the government. The remaining coal sold via e-auctions.

The pricing system has been subject to frequent disagreements between suppliers and end-users on a number of issues. These pertain to coal “grade slippage” – when there is a difference between the stated despatched and the actual quality of coal received – and disparity in domestic and international prices.

Roadmap for commercial coal mining

In March 2020, the Mineral Laws (Amendment) Act, 2020 came into effect. Under this, the central government decided to open up commercial mining to private investors in 2017-18, as per the Coal Mines Special Provision Act, 2015, for the first time since the coal industry was nationalised in 1973. The central government planned to allocate nine coal mines in the fourth tranche and six coal mines in the fifth tranche. However, they were cancelled due to poor response from bidders.

Hence, the Ministry of Coal came up with a revised methodology in late 2018. Under this methodology, the central government floated 19 bids under the sixth and seventh tranches of coal mines in October 2018. However, these were also cancelled due to low bidder interest.

Issues and challenges

One of the main objectives for opening up the coal sector to commercial mining is coal production. In India, factors such as delays in land acquisition, multiple approvals at the central and state government levels, as well as issues with coal transportation account for stagnant or falling coal production and consumption. If these issues remain unresolved, increasing coal production via change in ownership of the coal mine may not bring the desired results.

The decision to introduce commercial mining has come at a time when there is an increasing shift to renewable energy. In India, the government aims to increase renewable energy capacity to 175 GW by 2022. In this scenario, it is uncertain whether such a policy move will attract investors in the sector given all the negative perception around it.

In the Indian coal sector, there is no concept of an independent regulator. There is only a safety regulator, the Directorate General of Mines Safety. Thus, there is no redressal mechanism in place for the resolution of issues that may arise due to commercial mining.

The government expects private players to bring in new technologies, which will definitely lead to an increase in capital costs and final output costs with the increase in efficiency. In this case, the landed cost of coal to the power sector may not necessarily be lower than the cost provided by Coal India Limited (CIL). Further, the cost of coal is less than 50 per cent of the total landed cost of the power plant. The remaining cost comprises taxes, duties, cess and transportation charges. Each of these variables has been increasing steadily over the past few years. In this case, even if the actual cost of production is reduced due to commercial mining, the net landed cost of coal at the consumer end is unlikely to be impacted.

Of the total coal resources in India, only about 21 bt could be extracted technically and economically as per CIL’s red herring prospectus of 2010. If India’s coal demand continues to grow at a constant rate of 6 per cent as seen in the past decade, the country may run out of easily extractable coal down to the depth of 300 metres in the next few years. Thus, underground mining will have to be increased, which will require increased mechanisation and entail a higher cost of production. In view of all these factors, a coal consumer may not find coal to be as cheap as envisioned.

Future outlook

The 19 blocks that went under the hammer in the commercial coal mining auction of 2020 are expected to generate revenues of around Rs 70 billion per annum and create more than 69,000 jobs once these mines are operationalised. Total annual revenue generation from the auction is estimated at Rs 66.56 billion, considering production at an aggregated peak rate capacity level of about 51 mtpa. The total upfront amount of Rs 2.62 billion will be received by the states during financial year 2020-21 and the remaining upfront amount of Rs 7.86 billion will be received by the states subsequently, based on the milestones mentioned in the bid documents. The table gives a summary of the revenue projected for the states, the capital investment required and the total employment that will be generated. Meanwhile, the government has already announced details of 75 blocks that will be put out for auction over the next few months under Tranche 2 of the commercial coal mining auctions.

In February 2021, the Ministry of Coal initiated the next tranche (twelveth under CMSP Act, 2015, and second under MMDR Act) of the coal mine auction. A total of 75 mines with a capacity of 204.79 mt and reserves of 38,800 mt have been put on offer across seven states. Of these 75 blocks, 68 are non-coking/thermal coal blocks while five are coking blocks. Further, 40 coal blocks are fully explored, seven partially and 28 regionally explored. Amongst states, Chhattisgarh accounts for the highest number of mines, followed by Jharkhand, Odisha and Madhya Pradesh.