August 29th, 2007

Coal: A race for captive consumption The government recently amended its coal mining policy wherein it has allowed 100 percent FDI for captive consumption of coal for power, steel and cements sector, raising it from the earlier limit of 74 percent. This amendment is bound to attract further FDI in these sectors. Moreover, considering the shortage for availability of coal and price fluctuations in this competitive age, where coal accounts for a major part of raw material costs for power and steel companies, most companies prefer to have control over its coal requirements to insure them from price and supply volatility. The New Policy Initiative: According to the revised policy, the Government has raised the FDI limit for captive consumption of coal in to 100 percent from the previous defined limit of 74 percent. However this FDI is only for captive consumption of coal iin power, steel and cement sector and not for sale of coal in the open market. As in the previous policy, 100 percent FDI in the equity of an Indian subsidiary of a foreign company or in equity of an Indian company for setting up of coal processing plant in India shall be allowed subject to the following conditions: Such coal processing/ washing unit shall not engage in mining; and Shall not sell the washed/ sized coal in the open market and shall supply the washed /sized coal from their coal processing plants to the respective parties sending such raw coal for processing/ washing in their plants

For other private Indian companies, engaged in captive consumption of coal for power, steel and cement, 100 FDI is allowed. This policy will attract greater FDI in the power, steel and cement sector as coal accounts for substantial raw material costs and after investing billions of dollars these companies prefer to have captive coal resources to control their costs and ensure timely supplies. With ArcelorMittal setting up two 12 mt plant in Jharkhand and Orissa and Posco having decided to set up 10 mt in Orissa and waiting for coal and iron mines allotment, this amendment will facilitate such allotment. Domestic Coal Industry : An Overview Coal is a regulated industry in India with the nationalization done in two phases, the first with the coking coal mines in 1971-72 and then with the non-coking coal mines in 1973. Currently, Indias total coking and non-coking coal consumption for 2006-07 stood at close to 460 million tonnes. With almost 100000 MW of power projects being set up over next five years and 100 million tonne of new steel making capacity being added over the next ten years and similar heavy expansion plans in cement and sugar industry, there is going to be a huge increase in coal demand.

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Weekender

Aug 29th, 2007

Coal India Ltd, along with its eight subsidiaries alone accounts for around 85 percent of coal production in India. Most of the coal produced in the country contains higher ash but low sulphur compared to the coal available in the international market. With a view to improve the quality of coal by reducing the ash content, the coal is washed using various technologies. The following table shows the total reserves of coking and non-coking coal in India: Coal reserves in India (As on 1.1.2006, in Billion Tonnes)
TOTAL RESERVE 32 221 253 PROVED RESERVE 17 79 96 INDICATED RESERVE 13 106 119 INFERRED RESERVE 2 36 38

COKING NON-COKING TOTAL

Source: Coal Ministry With proven world coal reserves standing at 909.1 billion, India accounts for 10.2 percent of the global coal resources. Moreover nearly 70 percent of the coal reserves are concentrated in the four states of Jharkhand, Orissa, Chattisgarh and West Bengal. Further the total coal consumption can be divided amongst the different industries in the following manner:

Industry wise Coal consumption

Others, 7.91 Cement, 2.97 Steel, 4.32 CPP, 7.24

Power, 77.56

As can be seen from the above diagram, power sector alone accounts for 78 percent of total coal consumption in India and after including captive power consumption it rises to 86 percent. This is largely because over 80 percent of power projects are thermal coal based power projects. Steel and cement sectors account for 4.3 and 3 percent of total coal consumption respectively. In a preview to rising coal demand and need for secure supplies, the Government received 745 applications from a variety of companies for 15 power project linked coal blocks with estimated reserves of 3.6 billion tonnes, which can support power generation of 18000 MW. With mega projects being set up by domestic and foreign companies in power, steel, cement and allied sectors the demand for coal is expected to rise to 731 mtpa by 2011-12 and to 1125 mtpa by 2016-17. This represents a 59 percent and 144 percent increase from the current coal consumption respectively.

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Weekender

Aug 29th, 2007

Global Scenario: Coal being the cheapest source of energy, it currently meets over 26 percent of worlds energy requirements with the consumption growing at average rate of 2.2 percent per annum.. Most of the coal is consumed in the same country as it was produced, typically due to high transportation costs involved in coal trade. Only around 18% of hard coal production goes the international market. The biggest market for coal is Asia. Currently 54% of the global coal consumption takes place in Asia, mostly in China, Japan, India and Korea. Australia, with a total hard coal production of 274 Mt, is the worlds largest coal exporter; exporting 207 Mt. Australia is also the worlds largest supplier of coking coal, accounting for 51% of world total export. Coking coal is quite expensive compared to other types of coal and that makes it possible for Australia to afford the high freight costs involved in exporting coal worldwide. (Source WCI. The Coal Resource) Energy information Administration (EIA), in their international energy outlook report has projected that emerging economies will consume nearly 60 percent of the world total coal consumption by 2025 from 5262 million tone in 2002 to nearly 8226 million tones in 2025 fuelled mainly by emerging economies like China and India. Recent Deals Tata Power has acquired a 30% stake for around USD 1.3 billion in Bumi Resources two Indonesian coal mines, PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia (Arutmin) and a similar stake in the Enercorp, the domestic coal, oil and gas trading arm of the Bumi group. The deal also entitles Tata Power to off-take 10 million tonnes of high calorific value coal annually. The two coal mine together has 2,726 million tonnes of reserves. JSW Energy has acquired exploration and mining rights of a coal mine in, Indonesia, which has reserves of 300 million tonnes at $1.1 billion. It has also obtained further exploration rights for two mines in Mozambique. Tata Steel, keeping in mind future requirements of Corus, recently acquired 35 percent stake in Riversdale mine in Australia for $100 million. Bhushan steel acquired 15 percent stake in Australias Bowen Energy, a coal exploration and development company for $3.2 million.TATA Steel has signed agreement to buy a five per cent stake in Carborough Downs Coal Project located in Queensland, Australia, which is potential 100 million tonne reserve.

Short term outlook: In short term, the prices of coal are predicted to rise in 2008 to $100 per tonne from the current level of $80-85 per tonne. China which is the biggest producer and consumer of coal was a net importer for six consecutive months in June, ending centuries of selfsufficiency in coal. After Chinas large scale withdrawal from coal exports, South Asian countries including India had to rely on South African imports. However, a 25 million tonne deficit is predicted in 2008 which can get compounded with bottlenecks at port and rail systems in New South Wales, Australia.

KRC RESEARCH

Weekender

Aug 29th, 2007

Conclusion: The recent amendments made by the Government to raise FDI limit from 74 percent to 100 percent for captive coal consumption for power, steel and cement sector is certainly bound to attract further FDI in these sectors. There has been definitive steps take by companies operating in power, steel and cement sectors to insure stable supply of coal by acquiring mining rights both within India and abroad, but this will take some time before these mines become operational. However in short term, where global demand is bound to exceed supply, companies like SAIL and Tata Steel, Gujarat NRE Coke which have total captive sources for coal will see their raw material cost and thus bottom line insulated from price and supply volatilities.

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