It was the best of times; it was the worst of times; it was the age of wisdom; it was the age of foolishness. While the current dynamics of coal may not match the intrigue and tumult of A Tale of Two Cities , the initial sentiments certainly reflect how things are shaping up in the sector.
Recently, newspapers were all abuzz with Coal India's emergence as the country's “most valued company” in terms of market capitalisation. In stark contrast to this misplaced financial jubilation, India has been confronting severe coal shortages over the last few years, which has led to persistent complaints by State governments, public and private sector power generators, and steel companies regarding the availability and timely delivery of coal.
SUPPLY BOTTLENECKS
This deterioration in India's ability to extract its considerable domestic coal reserves is reflected in policy as well. The newest coal fuel supply agreements (FSA) by the Ministry of Coal guarantee at most 75 per cent of a power plant's fuel requirement; the balance must be procured privately.
Even if an FSA is obtained, which itself is a major uncertainty given the complications of the linkage approval process, the method of evacuation from source to destination — typically some mix of rail and road — and logistical management is often poorly coordinated by the agencies concerned, leading to further losses and delays.
Not surprisingly, many large coal consumers are resorting to higher quality imported coal instead, where the contractual and logistical obligations are more predictable. In response, coal exporting countries — most recently Indonesia — have begun responding to the global upsurge in coal demand by increasing prices and changing regulations.
India is expected to import upwards of one hundred million tonnes of coal in the next few years. Why has domestic coal production failed to keep up with demand? This is the question that has been perhaps the most difficult to answer, while various explanations have been put forward.
Some say that environmental clearance and land acquisition issues have been the main bottleneck. Others have blamed the inability of the state-owned coal companies to effectively integrate modern mining practices and technology into their operations.
Captive coal mine owners, both public and private, have also come in for criticism; many of their allotted blocks have been de-allocated after they failed to bring the blocks into production. Anecdotally, the association of criminal gangs with the coal industry and the resulting theft and dilution of grade is also understood. Consequently, the precise causes for the current shortcomings in domestic production are hard to establish.
COAL PRICING
The Indian coal market is an unusual beast. The state-owned production oligopoly between Coal India Ltd (CIL), Singareni Coal Collieries Ltd (SCCL), and Neyveli Lignite Corporation (NLC), has historically been complemented by a quasi-monopsony.
Power, iron and steel, and cement — the largest industrial consumers of coal — were also largely state-run or at least state-controlled until liberalisation, but it was actually the Railways that had significant pricing power because of its control over the evacuation and distribution of coal.
After liberalisation, the Ministry of Coal retained control of pricing until the early 2000s, when it formally handed over these responsibilities to CIL. Even then, only the highest grades of coal were sold at import parity prices, and lower grades — most of India's production — remained under-priced; presumably these prices were guided by the Ministry of Coal to keep down the cost of essential commodities, power in particular. In early 2011, CIL initiated a differential pricing system, which gave market-driven sectors higher prices.
Despite these changing pricing regimes, buying coal in bulk on the open market is actually quite difficult, except in black markets.
Of India's six hundred million tonnes of domestic coal production, almost 80 per cent is allocated through the Ministry of Coal's administrative committees to public and private sector applicants from various sectors.
An additional 10 per cent is sold through online e-auctions, which have resulted in considerable revenues. In 2009-10 e-auction prices were, on average, almost 60 per cent above notified prices.
Captive coal blocks, which will soon be allotted to public and private sector companies through competitive bidding, account for an additional 9 per cent. Finally, the last 1 per cent of domestic coal production is allocated to state government agencies, which make coal available in local markets. The rationale behind low coal prices was that resultant outputs — power, steel, and cement — needed to be cheap to encourage growth.
But looking at the most recent price statistics from the Office of the Economic Adviser, coal prices have increased by 89 per cent from 2004 to 2011, whereas electricity, steel, and cement prices have increased by 13 per cent, 26 per cent, and 50 per cent, respectively. The Wholesale Price Index increased by 54 per cent in the same period.
While electricity prices are regulated, the latter two commodities are not, which means these industries have managed to adequately internalise rising coal costs.
If this is the case, then the rationale for input subsidies in the form of artificially low coal prices is quite weak. But pricing is not even the fundamental problem here.
FAITH IN SYSTEM
The administrative system overseeing coal supply is losing its credibility. Power sector capacity, perhaps somewhat unwisely, has raced ahead of coal supply capabilities. Many currently operating plants, particularly those in the state sector, are functioning well below their plant capacity.
In the last year, barely any FSAs have actually been signed because of the inability to meet existing contractual agreements. The fragility of this system has come out in the last few months as labour unrest, heavy rains and the Telangana protests caused dwindling stockpiles at power plants and prolonged power outages in southern States.
In such unpredictable circumstances, even the private sector has become quite risk-averse. CIL's attempt to move towards calorific pricing has been repeatedly objected to by the power sector.
If implemented properly, such a move would theoretically improve conditions for the power sector. However, because of CIL's “poor track record in delivering quality coal,” many operators prefer status quo to any drastic changes.
While there is no simple solution to these problems, a serious inward look is in order. Acquiring coal resources abroad may make sense for strategic reasons, but given that it takes five to seven years to fully develop a coal mine, the short-term solutions must lie at home.
The Sankar committee report on coal sector reforms predicted many of these problems four years ago, and it may be time to revisit the recommendations of that committee.
Several important questions will need to be considered. For example, how has the productivity of Indian coal mining companies changed over the last 20 years? How do coal supply lines function, and where are the bottlenecks and diversions in this process? Is India extracting coal optimally from its domestic mines?
How is it possible to transition to a more open coal market in the existing legal framework? Paying some serious attention to these questions will help alleviate the constant fire-fighting that has been occurring over the last few years.
(This article is by special arrangement with the Centre for the Advanced Study of India, University of Pennsylvania.)
(The author is a Research Coordinator at CASI — Centre for the Advanced Study of India.)