Editorial Notes

[Editorial Notes] Crisis in Coal Industry

The Coal industry of India is not showing a sign of optimism in the near future. The post COVID-19 India needs a more thoughtful approach to rescue the industry from present state of stagnation and prevent its ultimate demise.
By IASToppers
June 10, 2020

Contents

  • Introduction
  • Coal Washing
  • Mine Allocation
  • Weakening of CIL
  • MDO mode of Mining
  • Conclusion

Crisis in Coal Industry

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Introduction:

The coal industry is facing friction both domestically and internationally for some time. Some of the reasons are the drying up of finances for new thermal power plants, private sector announcements of exiting the business, and declining plant load factors. The policy announcements of the Government of India regarding the industry are not showing positive signs.

Coal Washing:

  • The Central government is planning to do away with the mandatory requirement of washing of coal before it is transported to thermal power stations.
  • In 2014, as part of its climate change commitments, the government had made coal washing mandatory for supply to all thermal units beyond 500 km from the coal mine.
  • This was done in line with the country’s stand in climate change negotiations – not to reduce coal consumption and rather focus on emission control.
  • Washing coal increases the efficiency and quality of the dry fuel, therefore increasing its price.
  • 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.
  • The combustion of washed coal would be better from an emissions and local air pollution perspective, and the unnecessary transport of large amounts of ash and non-combustible material would be minimized.
  • In practice, most consumers of washed coal (both in steel and power) have regretted their decision as they were usually delivered a substandard product for which they had paid a premium.
  • Further, much of domestic coking coal today tends to be used for power generation as steel companies prefer to import their coking coal than rely on domestic products.

Mine Allocation:

  • Indian government has shown a failure in the coal mine auction mechanism.
  • In the last five years, aggregate production from auctioned mines has remained less than the heights of captive coal mining prior to the Supreme Court’s de-allocation decision in 2014.
  • Bringing auctioned mines into production is a three to five-year process, and it is unlikely that the current commercial coal mining regime will ever rival Coal India’s established production base.
  • Despite the repeated energetic announcements of introducing competition in the coal industry, the majority of domestic power consumers will continue to remain dependent on Coal India.
  • Further there exist the complicated bureaucratic and political hurdles associated with opening new coal mines.
  • Despite all the revisions announced in the stimulus package for Coal industry, new coal mine auctions are unlikely to attract significant domestic or international interest except from the few large players who already exist in the sector domestically.
  • International companies, which have avoided India’s coal industry so far because of regulatory and reputational issues, have zero incentive to take new risks in the Covid-19 world.
  • Smaller Indian companies simply do not have access to credit or cash on hand to open new mines.

Weakening of CIL:

  • There has been the deliberate weakening of Coal India’s financial position.
  • In addition to the usual royalty payments, cesses, taxes, and other fiscal contributions reasonably expected of Coal India, there has been a concerted effort to extract cash from the organisation.
  • Between inflated dividend payments, unnecessary share buybacks, and questionably useful corporate social responsibility contributions, Coal India has transferred tens of thousands of crore 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 (like the coal gasification mentioned in the stimulus package).
  • Coal India could have been strategically repurposed as a vehicle of industrial investment to help coal-bearing regions (where it has operated for 50 years) diversify their economies.
  • Instead, it appears to have become a victim of a larger strategy to weaken the Indian public sector.
  • Presently, Coal India’s market capitalization is less than a third of what it was in 2014.

MDO mode of Mining:

  • There has been the spectacular rise of the mine development operator (MDO) mode of mining.
  • MDO is a concept where in a coal block owner contracts entire operations to a third party, which takes the responsibility of land acquisition, resettlement and rehabilitation, mining, developing and operating the particular mine by investing in it and then supplying the coal at a tender determined price to the power plants of the mine owning state electricity boards.
  • It has also brought considerable financial and operational efficiencies to Coal India.
  • The default of once biggest private sector coal mine operator EMTA (Eastern Minerals & Trading Agency) has reflected the problems with MDMO related to transparency, undue transfer of gains to private entities and a general deterioration of social contract in mining regions.
  • The retreat of Coal India from the front lines and the increasing use of various forms of subcontracting has led to a much harsher face of mining in India today.
  • The MDO model also creates an incentive mismatch that why would a large mining company take the risks of buying a mine if they could make good money subcontracting for coal block owning public sector units instead.

Conclusion:

There was hope that the coal production would be accompanied by forward-looking policy measures which would focus on productivity, moderating coal’s considerable externalities, and some form of local equity. But this is not visible in the present scenario. The coming years need a more thoughtful approach to rescue the India’s coal industry from present state of stagnation and prevent its ultimate demise.

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