There is a crisis in the coal industry | Opinion – analysis
The headwinds of the coal industry both domestically and internationally have been evident for some time. The depletion of funding for the new thermal power plants, the private sector announcements of going out of business and the decrease in plant load factors have fueled pessimism about the future of the industry. Despite this, there was hope that the triumphalism of coal production would be accompanied by forward-looking policy measures that would focus on productivity, moderating the considerable externalities of coal and some form of local equity. Recent Government of India policy announcements regarding the industry are evidence that these dreams will remain an unfulfilled fiction.
The first nail in the coffin was the announcement to remove mandatory carbon washing. In theory, a process like coal washing was supposed to be good for everyone; Thermal power plants would have fewer operational problems due to poor coal quality, combustion of washed coal would be better from a local air pollution and emissions perspective, and unnecessary transportation of large amounts of ash and non-combustible material would be minimized. In practice, most consumers of washed coal (both steel and energy) have regretted their decision; they were generally given a low-quality product for which they had paid a premium. Not surprisingly, much of today’s domestic coking coal tends to be used for power generation, as steel companies prefer to import their coking coal rather than relying on domestic products. The dream of Indian coal washing had turned into a nightmare, and the notification from the environment ministry was a belated acceptance of the reality of the terrain.
The second nail in the coffin has been the failure of India’s coal mine auction mechanism. For the past five years, aggregate production from auctioned mines has remained below captive coal mining heights before the Supreme Court’s deallocation decision in 2014. Production of auctioned mines is a three-to-three process. five years, and it is unlikely that the current commercial coal mining regime will rival Coal India’s established production base. Despite repeated energetic announcements to introduce competition in the coal industry, the majority of domestic energy consumers will continue to depend on Coal India. Very few companies (public or private sector) have been able to match Coal India’s ability to overcome the complicated bureaucratic and political obstacles associated with opening new coal mines. Despite all the revisions announced in the stimulus package, the new coal mine auctions are unlikely to attract significant national or international interest, except for the few major players that already exist in the sector at the national level. International companies, which have so far avoided the Indian coal industry due to regulatory and reputational issues, have zero incentive to take on new risks in the world of coronavirus disease (Covid-19). Smaller Indian companies simply do not have access to credit or cash to open new mines.
The third nail in the coffin has been the deliberate weakening of Coal India’s financial position. In addition to Coal India’s customary royalty, cessation, tax and other tax contributions, there has been a concerted effort to extract cash from the organization. Between inflated dividend payments, unnecessary share buybacks, and questionably useful corporate social responsibility contributions, Coal India has transferred tens of billions of rupees to the central government in various ways. Coal India’s cash could have been used to further diversify the company, reinvest in new operations, promote research and development for alternative uses of coal (such as coal gasification mentioned in the stimulus package). Coal India could have been strategically reused as an industrial investment vehicle to help coal producing regions (where it has operated for 50 years) to diversify their economies. Instead, it appears to have become a victim of a broader strategy to weaken the Indian public sector. Not surprisingly, Coal India’s market capitalization is less than a third of what it was in 2014.
The fourth and final nail in the coffin has been the dramatic increase in mining mode of the mining development operator (MDO). Outsourcing of mining operations has been an important feature of the coal industry for more than two decades. It has also brought considerable financial and operational efficiencies to Coal India. But as demonstrated by the demise of coal mine operator EMTA, the MDO model remains fraught with problems related to transparency, the undue transfer of profits to private entities, and a general deterioration of the social contract in mining regions. In fact, Coal India’s withdrawal from the front line and the increasing use of various forms of subcontracting has led to a much tougher face of mining in India today. The MDO model also creates an incentive mismatch; Why would a large mining company risk buying a mine if they could make good money instead by subcontracting public sector units that own coal blocks?
To be clear, the status of coal as India’s energy operator in the electricity sector will not evaporate anytime soon; This will be a decades-long process. But with the coffin tightly closed, it may not be reasonable to have new dreams about the Indian coal industry. We may have to settle for decades of stagnation until its final decline.
Rohit Chandra is a member of the Policy Research Center.
The opinions expressed are personal.