The recent Supreme Court judgement that brought Coal India Limited under the purview of competition law, is a stark reminder to the government to ensure competition and price regulation in the domestic coal sector.
Splitting the state-run Coal India Limited (CIL) — a holding company of mining subsidiaries, created during the nationalisation in 1975 — is a definite option. India should also keep the import doors open whenever global prices dip.
The state sector leads in coal production in China as well. But, there is no monopoly.
Even the Chinese rail is split into several companies. In India, CIL is practically the sole commercial supplier and prices are unregulated.
A CIL Monopoly
As of 2022-23 (FY23), CIL contributed 79 per cent of the 893 million tonne (mt) coal produced in the country. Singareni Collieries (SCCL) — jointly owned by the state government of Telangana and the India government — contributed 7.5 per cent.
The rest came from captive miners.
SCCL is supposed to operate as a commercial miner. But, politics reduced it to a captive miner of Andhra Pradesh state utilities. This is an extremely high-cost company that shouldn’t last any competition.
And, there is no competition either. Private commercial miners have just started coming on stream. They produced barely 7 mt of fuel in FY23. The entire market float is dependent on CIL.
That opens a plethora of opportunities for the state sector. CIL hiked prices after five years in May 2023. However, the company’s consolidated net profit was 19.5 per cent of turnover in FY23.
The high margin does not justify CIL’s claim that it sacrifices profit opportunities otherwise available in the open market.
According to Screener, the state-owned iron ore miner NMDC Ltd reported 26.5 per cent net margin in FY23. For private sector giant Vedanta, the margin was barely 10 per cent.
Both operate in the open market and compete with imports. It is incorrect to benchmark CIL’s revenue opportunity against the landed cost of imported fuel and, e-auction prices of CIL coal.
Imported fuel is washed, thereby ensuring higher energy value for the same quantity and lower transport cost; comes in uniform sizes not exceeding 50 millimetre (mm) and; the customer pays on an ‘as-received’ basis.
There are few disputes on quality. In comparison, CIL produce suffers from a lack of standardisation. It sells raw fuel. The company promises to limit coal sizes to 800 mm but often sends unsized coal and even rocks, thereby increasing the handling cost of the consumer.
There are serious questions about the quality of CIL fuel. The most common refrain is ‘grade slippage,’ meaning they overcharge the consumer. The company gives precedence to its own quality measures and bills the consumer at the dispatch end.
After much ado, provisions were created for third-party sampling in 2015. But, questions galore about the efficacy of the mechanism.
The economy pays a price for such inefficiencies. According to P K Pujari former chairman of the Central Electricity Regulatory Commission, preventing grade slippage can reduce electricity tariff by 10-12 paise a unit.
The biggest beneficiaries of the monopoly are a few lakhs of unionised employees in CIL and SCCL who get fat salaries without much contribution to production and productivity.
A dominant majority of production comes at the expense of private mine operators, producing fuel at a fraction of the cost. SCCL rides on the landed cost of CIL fuel to Telangana and charges more. The ultimate price is paid by the Indian industry.
According to a government publication, when compared to GDP, India charges higher industrial tariffs for electricity than many developed countries.
Private Production Will Be Slow
As part of a major reform, Prime Minister Narendra Modi's government opened commercial coal mining to the private sector in March 2020. The Centre expects private miners to bring the much-needed price competition.
Such expectations, however, may not hold good. Ground realities suggest private miners are unlikely to throw any serious challenge to CIL in the foreseeable future of 7 to 10 years.
The production trend may prove to be similar to the captive mines, which took too long to be operational. There are a few structural reasons behind such expectations.
First, the blocks auctioned for commercial mining are from the pool once created from leftovers of CIL for distribution to captive miners. They are either not taken up for mining by Coal India or were relinquished by them.
In oil and gas, recycled blocks often produce startling results. But coal runs on different dynamics.
In opencast mining, which is a mainstay in India, asset viability depends on stripping ratio (amount of earth to be removed for every tonne of fuel), thickness and quality of seams, evacuation logistics, environmental vulnerability, cooperation of the state government etc.
While the government is addressing logistics issues; the rest of the problems remain.
This is evident in the return of blocks and the lukewarm response to the seventh tranche of the auction in June. Of the 103 blocks offered, only 18 received bids.
Essel Mining which has rich experience as a mining contractor, returned the 5 mt Radhikapur East block in Odisha. Chhattisgarh has denied granting mining leases to coal blocks in Hasdeo Arand and Mand River catchment area on environmental and ecological grounds.
Scrutiny of the reviews done by the nominated authority on the operationalisation of mines will prove that barely 18-20 blocks (out of 86 awarded) may come into production in the next two to three years. Barring a few, the majority are too small.
Odisha had a poor track record in developing captive mines. There is little progress in private mining in the state.
At the same time, blocks (like Gare Palma in Chhattisgarh) which had witnessed captive mining activity before the 2014 de-allocation, are on a fast track of development.
Jindal Power has brought Gare Palma IV/1 (6 mt) and, Gare Palma IV/2 and Gare Palma IV/3 (6.25 mt) into production. They will contribute the majority of the expected 12 mt private commercial production in FY24.
However, that doesn’t mean any increase in the market float of fuel. Jindals are likely to use coal for internal consumption. And, that’s the case with most major blocks which are expected to start operations in next few years.
No Threat To CIL
The bottom line is: private mining will take time to peak and most of their prediction will go to meet demand from industries which are now exposed to imports and/or costly CIL e-auction and bridge linkage etc.
This may replace part of CIL’s potential demand but, is unlikely to have any major influence on prices in the foreseeable future. On the contrary CIL prices will act as a benchmark in the market.
And, that may pose a serious hurdle to India’s growth potential. The solution lies in dismantling the monopoly and paving the way for some price competition.
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