Wednesday 1 April 2015
FT BIG READ. INDIA
Critics say Narendra Modi’s plan to double production at Coal India within five years is impossible. But
failure to boost energy supplies will hurt his goal of turning India into a manufacturing powerhouse.
A
large, colourfully painted
sign hangs above the
entrance to the depths of
Jhanjra, the largest under-
ground mine in West Ben-
gal’s Raniganj coal belt. The left side
shows Indian mining as it once was, with
roughly drawn cartoon figures wielding
basic shovels and carrying woven bas-
kets of coal, balanced on their heads.
The right paints a more modern scene,
featuring large yellow mining machines,
operated by skilled technicians.
Take the cage-like lift down hundreds
of metres into the darkness below, and
walk for nearly an hour through narrow
tunnels in stifling heat, and that second
image suddenly becomes real as a cut-
ting vehicle with fierce rotating metal
teeth, known as a continuous miner and
built by US manufacturer Caterpillar,
rips tonnes of black rock from the coal
face.
Mining technologies such as these can
help India stave off a looming energy
crisis, argues Sutirtha Bhattacharya,
chairman of state-backed miner Coal
India, which runs Jhanjra, and produces
roughly 80 per cent of the country’s
coal. Energy demand in India is set to
soar over the next two decades. But
domestic supplies of coal, its dominant
energy source, are barely increasing and
India faces a future dogged by power
cuts and reliant on expensive fuel
imports.
‘Coal India is a pretty
hopeless company. There
is very little chance it can
do what needs to be
done’
“The fundamental objective of our
country is that coal availability goes up,
and there is 24/7 power for everyone,”
says Mr Bhattacharya, describing his
task in patriotic terms. It is a view his
workers share. Deep underground, one
miner says he isn’t worried about miss-
ing out on India’s cricket team, who at
that moment are midway through a cru-
cial contest in the sport’s World Cup. “If
we don’t come down here, none of our
countrymen will have power to watch
the cricket [the national sporting obses-
sion],” he says, wiping sweat off his fore-
head. “For us, coal mining is a mission
for the nation.”
A ‘tall order’
Narendra Modi, prime minister, would
surely agree. Coal provides more than
half of his country’s energy and is set to
remain its most important fuel source
for decades, despite efforts to boost
alternative power sources such as
nuclear and renewables.
India will overtake the US to become
the world’s second-largest coal con-
sumer by 2025, going on to replace
China as the dominant source of new
global coal demand shortly afterwards.
But without more coal, Mr Modi’s hopes
of propelling his country towards eco-
nomic superpower status are in jeop-
ardy.
Yet India’s mining record is miserable,
leaving power stations idling for lack of
fuel and citizens plagued by blackouts.
Its coal industry is marred by corrup-
tion too: the Supreme Court in Septem-
ber cancelled hundreds of licences given
to private companies over the past two
decades, in a scandal widely known as
“coal gate”.
Dozens of these have been re-auc-
tioned over recent months, and this
week marked the deadline for many to
be handed over to new owners, herald-
ing something of a fresh start for the
nation’s battered resources sector.
Yet these auctions are only the first of
many larger challenges facing Mr Modi
as he tries to ramp up coal production
and reshape India’s energy sector,
beginning with an ambitious target to
double Coal India’s production to 1bn
tonnes by 2020. If that target is missed,
many of the prime minister’s cherished
political goals, from providing power to
hundreds of millions of his countrymen,
to transforming the country into a man-
ufacturing powerhouse, will be trashed
with it. If he succeeds, however, India
could face further deterioration it its air
quality.
Mr Modi’s progress will have signifi-
cant implications for global energy mar-
kets. Global resource companies such as
Rio Tinto and BHP Billiton hope India
will open up its state-dominated mining
sector and pick up some of the slack as
China attempts to wean itself off coal
amid a wider fight against pollution. But
it is even more important for India,
where a gradual economic recovery
under Mr Modi is set to see the country
overtake China next year to become the
world’s fastest-growing major economy
— but only if it can find sufficient energy
to sustain its growth.
“It is a considerably tall order, there is
★ FINANCIAL TIMES
By James Crabtree
At the coalface
Digging deep: Miners rest during a no doubt about it,” says Tom Albanese,
shift at an underground facility in chief executive at India’s Vedanta
Jharkhand – Ahmad Massood/Reuters Resources, and former head of Rio
Tinto. “Getting this right is one of his
[Modi’s] and India’s biggest chal-
lenges . . . The stakes are very high,
because every economy around the
world has seen that the cost of energy is
critical for growth.”
India does not lack for coal: its soil
hides 67bn tonnes of the stuff, the
world’s fifth-largest reserves, and more
than enough to provide plentiful, cheap
fuel for decades to come. Rather, its
problem is digging it up fast enough.
Here Coal India has an especially bad
reputation. Production has barely
budged in five years. The company cites
problems finding new land for mines,
winning environmental clearances, and
poor rail capacity to deliver coal to cus-
tomers. But many blame the company,
India’s energy mix Demand and supply forecasts
Consumption 2013 (%)
Tonnes (m)
Renewables 2.0 1.3 Nuclear Demand
Hydro 5.0
Natural
gas 7.8
Domestic
Oil Coal supply
29.5 54.5
2015 16 17 18 19 20
Sources: BP Statistical Review 2014; Ministry of Coal, Kotak Institutional Equities estimates
Licensing These problems date back to the
early 1990s, when rules were changed
Learning the lessons of to allow private companies to run
the ‘coal scam’ mines, as long as they used the coal
only to fuel their own industrial
India’s recent coal auctions raised hefty facilities. At first, few businesses
sums in a process generally viewed as applied. But as global coal prices
both fair and transparent — a sharp jumped in the early 2000s, competition
contrast to the allegedly corrupt process for domestic coal licences ramped up —
that forced them to be held in the first and with it worries about corruption.
place. “There was jockeying, there was
In 2012, India’s government auditor lobbying, and obviously people were
issued a damning report claiming that a willing to pay a price to get these coal
policy of handing out free coal mines to blocks under the table,” recalls Vinod
private companies had led to $33bn in Rai, India’s former auditor general,
potential lost revenues. Last year, the whose report first brought the so-called
Supreme Court seemed to agree and “coal scam” to light.
cancelled more than 200 licences, whose “Technically these mines were being
allocation it described as “arbitrary and given out free, but demand was huge,
illegal”, throwing the mining sector into and the process for handing them out
chaos. was opaque,” he adds.
which is 80 per cent government-owned
and run by cautious bureaucrats, for
failing to improve productivity.
Growing dependence
Such problems are hardly new. Coal
India’s lacklustre record prompted the
government to hand mining licences to
many well-known industrial tycoons
around two decades ago. As today,
purely commercial mining was banned,
but the thinking went that these busi-
nesses could use these mines to supply
their own power stations and steel mills
— lessening reliance on Coal India. How-
ever good the theory it triggered an allo-
cation process that led to last year’s
Supreme Court cancellations.
Despite this, Coal India remains the
country’s dominant fuel provider, and
its inefficiencies present an increasingly
grave problem. Energy demand is set to
The world’s biggest
coal producers
Tonnes (bn)
1200 China 4.0
1100 US
1000 India 3.0
Australia
900 Indonesia
2.0
South Africa
800
700
1.0
600
500 0 reforming Coal India, which has been in
1990 95 2000 05 10 13
Last year’s cancellations hit many of
India’s most powerful industrial
tycoons. The resulting scandal has
touched other prominent public
figures too, even Manmohan Singh,
former prime minister. Last month he
was instructed to appear before a
special court investigating one
particular coal mine allocation in 2005.
Mr Rai dismisses the notion that Mr
Singh was involved in wrongdoing, but
says the auctions have justified his
earlier decision to highlight faults in
India’s coal system.
The scandal has had positive side
effects too: India is set to auction
minerals such as iron ore and bauxite,
raising as much as $300bn over 30
years, according to Barclays.
“We have learnt a lesson as a
country,” Mr Rai says.
double by 2040, according to the Inter-
national Energy Agency. Most of this
will be met by coal. Unless domestic
production increases drastically,
imports will rise threefold over the same
period, helping to make India the
world’s most energy-import dependent
large economy.
“Whichever way you cut it, coal is
going to be front and centre of India’s
future energy mix, so supplies have to go
up,” says Arunabha Ghosh, head of the
Council on Energy, Environment and
Water think-tank in New Delhi.
Higher coal use need not lead to hor-
rendous pollution if India also invests
heavily in renewable energy, Mr Ghosh
suggests, while recent alarm over air-
quality problems in cities like New Delhi
can be tackled by curbing other factors,
such as the burning of agricultural waste
and reducing construction dust.
Even so, the idiosyncrasies of India’s
coal system make it difficult to increase
production. Most reserves lie in the east
of the country, in areas often covered by
dense forests, or affected by a long-run-
ning Marxist insurgency. Many of the
power stations and factories that need
fuel are in the industrialised west, how-
ever, meaning the average tonne of coal
travels roughly 650km before it can be
turned into electricity.
Mr Modi cannot do much about these
geographical problems. Instead, his
hopes for boosting production rest in
public hands since Prime Minister
Indira Gandhi nationalised mining in
the 1970s. Her creation is now the
world’s largest miner by output, with
more than 350,000 staff and a market
capitalisation of $38bn.
Coal India is not a single company at
all. Rather, it is an unwieldy conglomer-
ate, comprising eight mostly autono-
mous regional divisions, whose output
per worker is around a tenth of compa-
rable Chinese firms. Most of its nearly
500 mines are underground and tend to
be lossmaking. Its strip mines are more
profitable, providing more than 90 per
cent of output. But these are also more
environmentally destructive, guzzling
up land. Relocating villagers to clear
space to expand them “is our first-, sec-
ond- and third-biggest challenge”, says
A K Sengupta, deputy head of the
Sonepur Bazari open cast operation in
West Bengal.
Coal India’s chairman says production
can rise quickly despite this, from 490m
tonnes this year to 908m tonnes by
2020, not far shy of Mr Modi’s target. He
is also at pains to dismiss images of
9
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India’s medieval mining conditions.
“This is a myth, we are a modern opera-
tion,” he says, pointing to investment of
nearly $2bn next year in equipment and
infrastructure. The Jhanjra under-
ground mine is one example: produc-
tion will double over the next two years
with the introduction of a “longwall”
mining machine, due to arrive on a ship
from China.
Even so, Mr Bhattacharya admits
many things are outside his control.
Government permission to expand
mines needs to happen faster. India’s
state-owned railways must raise capac-
ity, notably by finishing three new rail
lines to transport fuel out of coal pro-
ducing areas. And that is just the start:
IEA figures suggest $41bn worth of
energy-related transport investment is
needed by 2035, alongside $53bn in
mining more generally.
Modi’s radical options
Many are sceptical. “It [Coal India] is a
pretty hopeless company,” says Sanjeev
Prasad, head of research at Kotak Insti-
tutional Equities in Mumbai. “There is
very little chance it can do what needs to
be done.”
Instead, he predicts the state-backed
miner will increase production margin-
‘Getting this right is one
of Modi’s biggest
challenges. [Lowering]
the cost of energy is
critical for growth’
ally, leaving India facing a supply gap of
252m tonnes by 2020, or a fifth of its
total coal needs. The result will be a
hefty increase in expensive imports, hit-
ting the finances of major industrial
companies, with damaging knock-on
effects for a banking system already
struggling under the weight of bad
debts.
Not everything comes down to Coal
India, of course. Mr Modi now plans to
auction more “captive” coal licences,
allowing further private companies to
supply their own industrial facilities,
helping to increase production overall.
India last month passed legislation
that could allow purely commercial
mining. “The door is slowly opening,”
says Mr Albanese, arguing that only for-
eign for-profit miners can bring the new
technologies and capital the Indian
resource sector needs.
Mr Modi’s predicament may push
him to consider more radical options,
especially for Coal India. The miner
could be broken up, letting its various
divisions compete against one another,
or gradually privatised by selling down
the government’s majority stake.
So far, his government — in power for
less than one year — has shown little
enthusiasm for such measures, espe-
cially given the battle they would entail
with powerful, strike-prone trade
unions. But many think they cannot be
avoided forever.
“It should be turned over to the pri-
vate sector, no matter how difficult that
proves,” Mr Prasad says. “India’s energy
system is in a mess. The economy isn’t
going to grow at 9 or 10 per cent again
until this is fixed . . . so big steps need to
be considered.”
Supply shy Energy demand in India is
set to soar over the next 20 years but
supplies of coal, its dominant energy
source, are barely increasing
Lights out State-owned Coal India
produces 80 per cent of the nation’s
supply, but its record is lacklustre.
India is plagued by blackouts
Long haul To hit Modi’s production
goals, India will need to improve rail
capacity, including finishing new lines
to cart fuel out of coal producing areas