The coal shortage situation in India over the last few months has assumed gargantuan proportions. The manifold reasons being given behind the shortage situation is lack of railway wagons for transporting coal, the green activism perpetrated by the Ministry of Environment and Forests (MoEF) and an apathy towards the development of infrastructure in transporting coal. This has led to a major impact on operations at cement companies which are already burdened with weak demand and an overcapacity situation.Green ActivismThe country’s state owned coal major Coal India Limited (CIL) has issued a warning that if the present system of issuing green clearances continues to remain in vogue, coal reserves in the country may become non mineable. The Maharatna company has stated that if the paucity in coal production was not addressed by the government, the country is likely to face a shortage of around 1,000 million tonnes of coal over the next five years, which accounts for the 12th plan period of 2012-17. CIL is awaiting clearance for around 178 projects and if the same is not granted, it accounts to a denial of around 200 million tonnes per year. New and more cumbersome directives are being issued by the MoEF for granting clearances like adhering to the Forest Rights Act. CIL has also been told that they must furnish data from the Differential GPS (DGPS) before their projects are taken up for consideration. The coal behemoth has also been told that they will have to mull over paying annuity for the project affected population. Another directive from the MoEF has made it compulsory for CIL to secure Forestry Clearances (FC) before getting Environmental Clearances (EC). Earlier, the company used to secure Environmental Clearances, commence mining in a particular area and then apply for Forest Clearances. However, the new clearance regime has mad functioning in new coal mines difficult.
Procedural DifficultiesA stage has been reached by CIL where it is not in a position to augment coal production from existing mines or through starting new mines. Data provided over the last few years denotes that there has been a slowdown in coal production by CIL. The company’s coal production was pegged at 323 million tonnes in 2004-05 which further increased to 431 million tonnes in 2009-10, a rise by over 100 million tonnes in 5 years. In 2010-11, the coal behemoth registered a zero growth production figure. CIL has also not been in a position to projectise virgin coal blocks due to a past faulty government policy. The company had stated that starting 2011-12 till 2036-37, it could produce 500 million tonnes of coal per year if it was allowed to retain 289 virgin coal blocks out of a total 499 coal blocks for meeting its long term requirement. The 289 coal blocks, known as CIL coal blocks were potentially mineable with developed infrastructure in form of rail, road power etc as compared to other 174 coal blocks which included those to be given to private parties for captive mining or were unexplored or away from developed infrastructure. However, the Ratan Tata headed Investment Commission of 2006 recommended a de-reservation of the CIL blocks which was accepted by the Prime Minister’s Office (PMO).CIL was in plans to projectise only 150 blocks till 2011-12, the remaining fully explored virgin CIL blocks, totaling 79 blocks, were de-reserved. Due to the go/no-go controversy, many of CIL’s virgin blocks which the company had planned to projectise by 2011-12 cannot be explored as they lie in dense forests with newer coalfields or existing forests with already high levels of production. This has seriously hampered CIL’s coal production capacity and the company is desperately looking at clearance of these blocks for the opening of new mines and augmentation of its production levels.Impact on cement companies and the road aheadCommenting on the effect of the coal shortage situation on the cement industry, Mr R.K.Sachdeva, coal consultant stated, "the shortage of coal will not have a major impact on cement production in the country. However, the cement industry is not serious about consolidating its requirement of coal. Captive mines which have been allotted to coal companies are not looked after and developed by the companies. The bigger players in the industry are not suffering much on account of the shortage situation."Till three to four years back, the cement industry did not import coal for manufacturing cement. However, in recent times with a shortfall in coal production, imports of coal for cement production has increased, leading to a rise in cement production costs. "The cement industry has become more price sensitive with the increase in imports of off spec coal from South Africa. Various cement companies which were importing petcoke earlier have resorted to importing thermal coke which is cheaper and has a high sulphur content." Opined Mr Jitendra Roy Choudhury, Manager-Analytics, Salva resources. Reiterating further, he said, "there is no quick fix solution to the problem of coal shortage and Indian cement companies will have to bear with the situation. Developing a coal mine in India requires a lot of time and the main hindrances in the process are statutory regulations and various clearances to be obtained from the concerned authorities. The cement companies which are in possession of coal mines do not have any extensive experience of maintaining them. hardly 2.5 percent of the total domestic production."However, it is expected that the Indian cement market which is largely dominated by big players like UltraTech, Jaiprakash Associates, Shree and India Cements, only the midsized and smaller players will suffer if the prices of coal increase further. However, even the bigger players have reiterated that any further hikes in coal prices will be pushed on to the consumer as the companies cannot keep on selling material at lower prices even as input costs escalate.ConclusionThe coal shortage situation needs to be addressed quickly by the coal manufacturers in order to ensure the smooth functioning of cement companies. This can be achieved through the proper facilitation of a smoother environmental clearance system by the Ministry of Environment and Forests (MoEF), augmentation of coal production by coal manufacturers from their existing mines and new mines as well as cement companies switching increasingly to alternate forms of energy.Mr Sumit Banerjee, Vice Chairman Reliance Cementation spoke to ICR on the impact of shortage of coal on the Indian cement industry. Given below are the excerptsAre you experiencing any shortfall in coal supplies? If yes, since when and could you quantify it in terms of numbers?Coal is the primary source of energy for cement manufacturing and has a significant impact on its business. A widened demand-supply gap, which stands at about 130 million tons this year, would necessitate an increase in costly imports putting industries’ margins under pressure.What are the steps, you feel, should be taken by coal manufacturers to rectify the situation?Coal manufactures should accelerate coal production from all its existing mines and simultaneously explore new mines to address the shortfall. This off-course has to be supported by favourable regulatory and environmental policies and privatization of commercial coal deposits.Have you planned any steps to tackle the shortage situation? If yes, could you elaborate on the same?
It is an imperative for the industry to not only explore alternate sources of fuel/energy but also strive to enhance operational efficiency through deployment of advanced technology in waste heat recovery systems. There is a huge potential for increasing the usage of alternative fuels in India as it generates over six million tonnes of hazardous waste and about 50 million tonnes of non-hazardous and municipal wastes, apart from a large quantity of agro-waste. However, to harness this potential the industry needs to work on appropriate supply chain infrastructure and the government needs to facilitate this through enabling policies.In case of importing expensive coal, what will the effect on the profit margins of the companies?
The impact on profit margins would vary from company to company based on the mix of linkage coal, open market / imported coal and pet coke. However, at the industry level, the average impact on EBITDA margin could vary in the range of 1% to 1.2% considering that the open market coal has to be replaced with imported coal, due to domestic shortfall. Besides, the cement companies will also be exposed to the volatility of global coal prices.What support do you expect from the government in this regard?This situation could change in the longer term by providing equal opportunities while granting mineral concessions to Private Sector Companies like in other non strategic minerals. Also Government could encourage privatization of commercial coal minesWhat effects do you foresee on the cement export sector on account of the coal shortage problem?
Cement exports from India is negligible and accounts for only ~2.5% of the total domestic production and hence no major impact is envisaged