Commercial coal mining unlikely to attract power players
* The government has allowed commercial mining in the coal sector on a revenue sharing model by the private sector Indian and overseas miners. By allowing the same, the government has ended the monopoly in the coal sector.
* In a first, the govt plans to auction 50 coal blocks for commercial purpose. The move is aimed at bringing competition, transparency and efficiency in the sector through private participation and thereby, lower coal imports (247.1MT in FY20 vs. 235.35MT in FY19).
* However, the move is unlikely to reap any near-term benefit to the power sector due to its long gestation period, subdued power demand, no major thermal power capacity additions, focus on renewable capacities and sufficient ramp-up across Coal India Ltd (CIL).
* Our assessment, based on our interaction with many listed/unlisted power companies, suggests that the coal commercialization reform will not attract much of their interest.
Power developers may shy away from coal auction due to below concerns:
* Current coal supply sufficient to meet fuel requirement of thermal stations: -
The current stress in the power sector is largely due to ailing health of discoms’ financial and subdued power demand and not due to fuel supply constraints. The power demand has taken a huge knock during the lockdown period falling by ~25% yoy in April’20 and by 18% yoy during May’20. Thus, power demand is expected to remain subdued in FY21 even after the lockdown is relaxed due to underutilization across the commercial and industrial sectors. Currently, thermal plants are operating at sub 40% PLF and we expect the same to average at 50% on FY21. Furthermore, the combined coal stock of 119.24MT at power plants and at pitheads of CIL is highest ever dispelling any notions of coal shortage in the near future
* Long gestation period for coal excavation: -
Land acquisition, environmental and forest clearances, rail/road connectivity, rehabilitation and resettlement (R&R) generally takes 4- 5 years period and then, overhead excavation takes another one year before coal productions at mines. Thus, even if bidding happens in FY21, the coal excavations is unlikely to happen before FY26-FY27. Therefore, we believe that the opening of the coal sector is unlikely to reap any near to medium term benefits to the power sector.
* Stressed asset can’t hold so long: -
As the coal excavation can happen only by FY26- FY27, the current stressed assets are unlikely to witness any near-term benefits of this reform. Even if we assume that the economy would strongly bounce back after 3-4 years and there would be a sudden spike in power demand, the coal commercialization will not benefit the sector due to the non-availability of coal from the mines. Furthermore, the companies/groups holding these stressed assets may not have the appetite to nurse these assets for such a long period of time. Thus, the assumptions that the commercialization of coal mines would address the requirement of fuel-starved assets could just be a myth.
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