Subdued demand, sufficient coal stocks may dampen interest in mining rights

Source : IANS
Author : IANS
Last Updated: Thu, May 21st, 2020, 09:05:43hrs
Subdued demand, sufficient coal stocks may dampen interest in mining rights

New Delhi: The Government move to end Coal India's monopoly in coal mining by allowing commercial miners in the sector may not attract the requisite participation from domestic and global entities as fuel demand currently is subdued while CIL production is more than sufficient to meet the domestic coal demand.

According to a research report released by Emkay Global, commercial coal mining projects are long gestation projects that would bring benefits to consumers only in the long run.

But with no major new thermal capacities coming up in the next few years and CIL setting a target of producing 1 billion tonne of coal by 2024, investments on coal mining on commercial terms may fetch low returns while pose risks on getting adequate market, the brokerage said.

As part of the Rs 20 lakh-crore economic package that also unveiled various reform initiatives, the government last week announced opening of coal sector commercial meaning anyone can come and mine and sell coal on commercial terms. As part of this, 50 coal blocks are proposed to be auctioned to interested entities.

The government said the move is aimed at bringing competition, transparency and efficiency in the sector through private participation and thereby, lower coal imports that stood at 247.1 million tonne (MT) in FY20 as against 235.35 MT in FY19.

"The current coal supply is sufficient to meet fuel requirement of thermal stations. The 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. Power demand is expected to remain subdued in FY21 even after the lockdown is relaxed due to under-utilization across the commercial and industrial sectors.

"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," the brokerage said while justifying why interest in commercial coal mining may be subdued initially.

Moreover, the move is unlikely to support the power sector in near to medium term with each mine taking about 4-5 years to come to production stage. This would be too long for stressed power projects who can't wait for power demand to pick up over next few years and then wait further to get production from coal mines.

Apart from sufficient availability of coal in a low demand market, commercial mining rights on proposed revenue sharing model could lead to high cost of power, making electricity charges expensive for consumers.

"The auction and revenue sharing model of these mines would lead to high production cost of coal, which would result in higher tariffs for the developers. These would restrict the power generated from the use of these fuels to qualify under the Merit Order Dispatch of the discoms and may face backdowns.

"Thus, the business model of these coal blocks may not fetch the need to lowering power procurement cost of the discoms, which are already reeling under huge financial losses and outstanding payments," Emkay said in its report.

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. Currently, thermal plants are operating at sub 40% PLF and are expected to maintain the same to average at 50% on FY21.

The assessment of the brokerage is based on its interaction with many listed/unlisted power companies.