Coal India to Feel the Heat as Modi Government Throws Open the Doors for Commercial Mining

Will CIL sink like BSNL and MTNL or rise to the occasion? And what will it mean for its bulging employee base?

India had nationalised its coal sector in 1973. Credit: Reuters

India had nationalised its coal sector in 1973. Credit: Reuters

New Delhi: Nearly 44 years after India nationalised its coal sector, the industry has been thrown open for participation by private players, in a move that would bring in competition for state-owned Coal India (CIL), which has till now enjoyed a monopoly over the business.

India nationalised its coal sector in 1973 as the private sector had messed up the industry, starving it of investment. Safety standards were poor and the lives of the miners miserable.

The restrictions of nationalisation then slowly started being removed from the early 1990s. As the first step, private players were allowed to mine coal for captive consumption. Although the public sector coal producer has been gearing up to face private competition ever since the Modi government introduced an enabling provision via the Coal Mines (Special Provisions) Act to end its exclusive right to sell coal, it could still feel the heat.

Private players are expected to use technology-intensive mining practices in contrast with CIL’s labour-intensive techniques. The public sector producer is saddled with an excess workforce, which it cannot downsize easily as a PSU. That means its costs of production would remain on the higher side, hobbling it from competing with private players on equal terms.

It has also struggled to step up production to meet coal demand. Against the target of 406.6 million tonnes for April-December 2017 period, CIL produced just 385.6 million tonnes. The production target for CIL for the full fiscal is 600 million tonnes. From the production level of 554 million tonnes in 2016- 17, the PSU is envisaged to raise its coal output to one billion tonnes by 2020, a target that looks quite challenging for it given its uninspiring performance in recent years.

The government has raised production target for CIL by 5% to 630 million tonnes in 2018-19. Given CIL’s lacklustre performance in recent years, there is a fear that coal PSUs could meet the same fate as state-owned telecom companies like BSNL and MTNL, which have substantially lost market shares to nimble-footed private players.

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However, not everyone is pessimistic about CIL’s future. If CIL and its subsidiaries can stand up to competition, they would end up stronger like ONGC, Oil India in the oil sector and NTPC in power generation business. It is because competition will spur CIL to get its act together, say energy experts.

There are signs that CIL is shaping up. The company management has realised the significance of keeping workers engaged and motivated.

“More challenging times are ahead. Soon, mines for commercial exploitation will be offered to the private sector and in the not-too-distant future, private sector production may turn out to be significant,” CIL chairman Gopal Singh recently told employees of all subsidiaries in a closed-door video address while congratulating them on their promotions. This was the first such interaction by CIL chief.

CIL has decided to shift to a new, calorific value-based pricing for its coal from April 1. It currently follows useful heat value (UHV)-based pricing.

Under the proposed pricing mechanism, the price of each tonne of coal will be based on its total energy content. Currently, the price is the same for a range of energy content under a particular grade.

CIL has, however, reduced the number of grades from earlier 17 to ten under the new system. The broad category of grades has been divided into three – high energy content, medium energy content and low energy content.

According to CIL chairman, the new system is based on the global system of coal pricing and it provides consumers with a more accurate and transparent method for arriving at coal prices. Under the existing band pricing system, consumers have to pay a fixed price for different energy content as long as it is within one band. When the new pricing system comes into effect, they will be required to pay different prices for different energy content in each band.

Managers will focus on quality since marginal improvement even by one unit of energy will fetch additional revenue to the individual mine and have an impact on the bottom-line of the unit. However, analysts cautioned that the new pricing mechanism will work in CIL’s favour only if it can control quality and assure supplies in the higher bracket of a said coal grade.

CIL has issued an indicative price chart for its customers.

Meanwhile, there are indications that India will continue to rely on coal for its electricity security in the foreseeable future, notwithstanding the threat of climate change.

“Coal to continue enjoying demand for some more time in India: Even in the most adverse scenario, as of 2Q17 (second quarter), it appears that the demand for coal in India, as a source of primary energy, shall expand until 2030 and perhaps beyond,” said a recent study.

Overall coal demand is estimated to be 900-1,000 million tonnes per annum (mtpa) by 2020 and 1,300-1,900 mtpa by 2030. Thermal coal demand will be 1,150-1,750 mtpa and the balance is coking coal demand, according to ‘Coal Vision 2030’, which was commissioned by CIL.