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Competition leads to efficiency
Government of India has promulgated Mineral Laws (amendment) ordinance, 2020, which opens up commercial mining of coal to the private sector. We believe this move is to limit import of coal (primarily non-coking), which touched 235mnte in FY19 (up from 215mnte in FY18), with a forex outgo of Rs1.7tn (of which noncoking coal was 183.4mnte with forex outgo of Rs988bn). Coal demand in the country during FY19 was 968mnte (of which 608mt was supplied by CIL) which is expected to increase by 4-5% despite significant renewable capacity addition. Our estimates suggest even if 200GW renewables capacity comes on-stream by FY30, coal demand will increase to 1.3-1.4bnte, of which only 1bnte is planned by CIL. Hence, other players will be required to contribute significantly to minimise imports. We believe this move benefits domestic coal consumers while encouraging Coal India to rationalise costs and improve efficiency.
* Ordinance opens up mining to private players; removes end-use restrictions: The Mineral Laws (Amendment) ordinance opens coal mining to all, removing restrictions as mentioned in the MMDR Act, which provided that auction of coal and lignite mining blocks were to be open only to companies engaged in iron and steel, power and coal washing sectors. This comes at a time when the GoI is planning to offer more than 200 coal blocks through the auction route in the next five years (peak cumulative capacity estimated at 400mtpa), the first tranche of which (40 blocks) is expected to open before the end of FY20. Removal of end-use restrictions is expected to increase the participation of larger players (both domestic and global) in these auctions, lack of which led to the auction of only 29 blocks during the past five years, since the cancellation of 214 coal blocks by the SC.
* Private participation to co-exist with CIL: In FY19, India’s demand for coal was 968mtpa. Of this, CIL accounted for 608mtpa, SCCL for 50mtpa, captive production was 57mtpa, while the balance was imported. 235mnte coal was imported during FY19, while for 8MFY20, the figure is 161mnte (up 4.4% YoY). Taking coal demand growth at 4% p.a., India’s demand is expected to reach >1.3-1.4bnte by FY30 (we expect coal to remain the dominant source of power generation in the medium term despite expected 200GW installed renewable capacity). With the auction of peak output from mines estimated at 100-200mtpa by FY25 and imports to reduce, CIL is expected to remain the major supplier with reserves of 22.3bnte as at the end of FY19.
* CIL to remain highly competitive: With average strip ratio of 2:1, CIL’s variable cost for coal production remains low. Of the Rs1,143/te (ex-OBR) cost in FY19, 638/te is employee cost for a workforce of 0.28mn (large part is fixed in nature). We believe with robust VRS scheme and natural retirements, this cost can be significantly controlled. Although average realisation for CIL was Rs1,528/te in FY19, 85% (Grade 8-14) of thermal coal was sold at an average rate of Rs965/te. We believe the upcoming blocks to be auctioned will mostly have higher strip ratios and hence, their cost competitiveness remains a challenge. Significantly, revenue sharing with government (in lieu of per tonne premium) as well as land acquisition (costs and difficulties related to which have increased considerably since the passing of the LARR Act, 2013) related costs are expected to add to the overall mining cost against which CIL will provide a job to every rehabilitated family.
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