THERMAL COAL SERIES: India's commercial mine auction may not offset imports soon

This five-part series on the thermal coal market analyzes the impact of India's commercial auction of mines on imports; Indonesia's continued domination as the top exporter; how South Africa's transportation issues are unlikely to hurt supply to India; the effect of renewables on the JKT market; and China's buying pattern and its impact on future prices.

Auctioning coal mines for commercial sale has been one of the most touted pledges by India to increase domestic production and reduce dependency on imports, but slow operational development, financing troubles and low private participation have raised some concerns about its effectiveness.

Through commercial mining, producers are allowed to sell coal to any buyer without any ceiling on the price, and a portion of the revenue must be shared with the state governments.

Ever since the commercial coal mine auction was launched in 2020, the federal coal ministry has offered around 150-160 mines through nine rounds of auction, of which seven have already been completed, a senior official from the coal ministry told S&P Global Commodity Insights. However, market participants said the total number of offered mines could be higher.

The auction of only 91 mines has been completed through the first seven tranches, while results of the eighth and ninth rounds hang in the balance. The wide gap between the number of offered mines and auctioned mines was largely due to the lower-than-expected interest from private players, thermal coal market participants said.

While the gap was a concern, market participants said the bigger issue was that only eight mines out of the 91 auctioned are currently operational, a success rate of 8.8% so far.

Two of the eight mines started operations in January 2024. "The real challenge is not the disparity between the total number of offered mines compared to that of auctioned ones, but the operationalization of these mines," a senior analyst from ICRA said.

Also, while the coal ministry official said new coal projects were getting regular funding from banks, some private players have found it difficult to get financing for investment in new coal mines, a trader based in India said.

"Previous attempts to attract private investment for new mines have had limited success, partly due to the companies' reluctance to engage in long-term investments in the fossil fuel sector," S&P Global analysts said.

Delays in approval, funding

The primary reason behind only few mines currently being in production might be the long clearance process before the mines can start operations.

The prerequisites for starting a new mine include the approval of a mining plan, the grant of mining lease, environment, forest and wildlife clearances, the land acquisition module, and a safety management plan, among others, according to the coal ministry's website.

The coal ministry official said some of the clearances come from state governments, which can further delay the process of starting operations.

Furthermore, some companies were finding it difficult to secure foreign funding as several overseas banks were wary of financing fossil fuel projects amid the rising demand for clean energy, the ICRA analyst said.

The Indian government has set a target of producing 145 million mt of coal from the operational captive and commercial mines in financial year 2023-24 (April-March). So far in the April-December period, the total output from such mines was at 98 million mt.

Coal imports for energy security

Despite the government's emphasis on increasing energy security by ramping up domestic production and auctioning more mines, market participants said coal imports still have an important role to play, adding that historically, the country's imports have risen amid rampant industrial development.

Currently, 20%-25% of India's coal demand is met via imports, according to the coal ministry's website.

The gap between domestic output and surging demand remains despite Indian production rising in the last few years, which is why imports have also risen over the years, an Indonesia-based producer said.

Since the inception of commercial coal mining, India's total coal imports have risen by 14.6% over three years to nearly 255 million mt in 2023, according to data from S&P Global Commodities at Sea.

Besides, while India has been pushing for renewable energy generation, there have also been plans to expand coal-based infrastructure, which indicate that the dependency on coal might not go away anytime soon.

India's fossil fuel-based power generation rose 9.9% in April-December, while its clean energy- and nuclear energy-based generation fell 1.2% in the same period, provisional power ministry data showed.

The government's plan to stop coal imports completely by FY 2025-26 is in contrast with the power ministry's earlier announcement to add 80 GW of coal-based power generation capacity by FY 2031-32, an Indian trader said, adding that rising demand will also boost imports as domestic output is unlikely to surpass the rate of increasing demand.

According to data from Platts, part of S&P Global Commodity Insights, the India-delivered price of global 5,500 kcal/kg NAR coal was at $75.75/mt on Jan. 2, 2020. The price rose to $110.70/mt on Dec. 29, 2023, implying that imports rose despite a significant increase in the landed price.

India still has power plants that run completely on imported coal as their boilers are designed for that, so it is unlikely that coal imports will stop completely, the analyst from ICRA added.