India Just Opened Its Coal Sector To The World, But Is That A Good Thing?
Can coal be India’s savior?
That’s what the government is hoping for with its latest move Wednesday when it allowed 100% foreign investment in mining of coal in an effort to give a boost to a flailing economy.
Till now, foreign investment was only allowed in coal mines allotted for captive use, meaning for use by the companies themselves. But now with economic growth slowing to 5.8% in the quarter ended on March 31 and a similar figure expected for the following quarter (data for which was not available at the time of publication), New Delhi is trying to attract foreign investment to get economic growth back on track.
Mining magnate Anil Agarwal, who owns London-headquartered Vedanta Resources and who has a stake in miner Anglo American, reportedly said his company will “definitely be interested. Let’s see how fast the government come with the tender and whatever they have in mind.”
But not everyone is convinced the move will do much to benefit the coal industry or the wider economy.
Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis, says he “expects foreign corporate responses to be muted, at best.”
One reason is that historically the government has favored the state-run Coal India for mines where it was easier, and cheaper, to access the coal, while the private sector was invited to bid for deposits that were generally in harder to access sites or with geological or land acquisition impediments, says Buckley.
The last time companies actively bid for coal mines in India was in 2015-2016, and that bidding spree occurred because the country’s top court in 2014 canceled allocations of 214 coal blocks on charges of collusive bidding. Companies had no option but to bid again as they needed the fuel for their stalled businesses.
That said, there are two new domestic players–NTPC Ltd. and Adani Enterprises (the latter is owned by billionaire Gautam Adani)–which have seen some success in developing coal mines. Both are well-connected firms with significant financial and political resources, says Buckley, but both have seen coal outputs well below their touted targets. For instance, while both companies have long targeted production of more than 100 million tonnes per annum, NTPC saw production of a paltry 7.3 million tonnes while Adani eked out 15 million tonnes in the year ending March.
That apart, there’s also a new global trend of coal majors exiting coal mining either entirely or divesting historic investments, says Buckley. Some of the companies that have announced those moves include Rio Tinto, BHP, Anglo American, South32, Mitsubishi, Mitsui & Co and Itochu. The number of globally significant financial institutions with formal coal policy restrictions is growing with every month, as IEEFA recently documented (and it notes 2019 has seen a new announcement every 1 to 2 weeks, with at least 108 globally significant public and private banks and insurers noted).
“Global investor appetite for new thermal coal mine exposures is rapidly diminishing as global investors move to align with the Paris Agreement of 2015, which requires the total exit of thermal coal use by 2030 in developed markets, and by 2050 globally,” says Buckley. “South Africa’s Seriti Resources’ inability to complete its IPO this week shows this is a growing global headwind,” he adds.
Kanchi Kohli, a senior researcher at the Centre for Policy Research, a New Delhi think tank, agrees and says as a result, India is “likely to receive investments from companies who would be the worst violators of this pact.”
Then there’s the pure economics of it all. In India, variable renewable energy infrastructure investments have been consistently tendered at Rs2.4-3.00/kWh over the last three years. That, as per IEEFA’s math, is about 20% below the Rs 3-4/kWh that power plants that are close to the mouth of the coal mines charge, and 30% or more lower than the power plants that are further away from the mines.
Yet it’s anyone’s guess why the government is pinning hopes for its beleaguered economy on this sector.