India remains uniquely advantaged on coal, not just because of the reserves (43 years of current consumption) as part of the natural endowments, but because the cost of extraction is also low, thanks to the overall current stripping ratio of the entire system. What one pays for coal however, where a substantial component is government revenue is another matter.
Stripping ratio, which is the ratio of overburden or the waste rock (non-coal deposit that must be removed to get coal) in cubic meters and the coal extracted or produced in tonnes. So when stripping ratio is one, it means to remove one tonne of coal 1 cubic meter of overburden was removed. When stripping ratio moved up above 3 cubic meter, the cost of coal production would increase as three times the amount of overburden has to be handled and sometimes re-handled.
Thankfully the current stripping ratio of the entire Coal India production at the aggregate level is 1.63, a number which is one of the lowest in the world. Practically, most mining in India has remained open cast because of this reason, for higher stripping ratio one would need underground mining, which needs a higher capital outlay and manpower as well.
But it could also mean that India has taken all the advantages of all the low hanging fruits that lay in the last several decades and left out the deeper extraction to the future, which would entail under-ground mining and higher costs as well.
Underground mining also would mean higher levels of skills and adoption of the safest technologies and processes. This is where the attention needs to be focused on.
India has hardly invested in underground mining, out of the Capex outlay in Coal India, a bulk of which is for underground mining, the actual progress against plan leaves a lot to be desired. Also there is an increased emphasis of avoiding underground mining by moving to opencast. Underground mining remains the dominant method of mining in China where large forest cover exists and where stripping ratios are high.
If we account for the near future production plans, the future stripping ratio would be closer to 2.67, a jump of 60 per cent, which would also mean a cost escalation of 30 per cent. But considering the blocks that have been offered to the private sector through auctions, the average Stripping Ratio would be well above 4, which is also one of the reasons why most of the auctions have become unattractive to the private sector. The Government has also not made the economics attractive by making the right allowances for balancing the high cost of extraction ordained by the high stripping ratios.
The deeper question is at the current stripping ratio that actual cost of production of coal is really quite low, in spite of the high overheads Coal India could be carrying as a public sector.
Why then would the price of coal actually paid for be so high? Well, the answer is very simple that the price includes all forms of taxes including GST and Clean Energy Cess, which goes as revenues to the Government, Center and State included. How much is this? It ranges between 30 per cent to 60 per cent of the price of Coal that is offered as part of fuel-supply agreements or linkage or linkage auctions. This could change if the auction premia move up, but for coal blocks under auction, the total revenues received by the government would be much higher than the 60 per cent mentioned.
This is also another unique feature of coal pricing, the rationale being that the money collected from coal would be utilised for development of the lowest sections of the country, especially in the coal belts. The Clean Energy Cess is also meant for the allowance for subsidies in the renewable sector, which would be enjoyed by the industry at large.
Coal demand in India had been growing rapidly in the past at a CAGR of close to 10 per cent, but only recently it has come down to a CAGR of less than 5 per cent, thanks to the renewables, which has shown 30 per cent YoY change, although on a smaller base. The economics of renewables is also looking up with unit costs drastically coming down making it far more attractive. But renewables would still remain far from being the main staple as long as coal supply continues economically and efficiently, the reason being that renewables with unpredictable and low power factor would continue to remain a filler-energy source while the main staple would remain as coal, at least for India.
The demand for energy is growing not only for the power producers, but also by the industries that use it for their captive consumption and also as part of feedstock, like in aluminum and cement. With imports into India touching 200 MT, it is also a missed opportunity that India with such high reserves would have to still depend on imported coal, the challenges most often is in the area of logistics.
Coal is sold by Coal India on the FOB basis, which means that the cost and burden of transporting coal to the end use plants remains with the buyer, so there is no urgent need for Coal India to look at logistics as an important driver of results. Coal India has Director Commercial, Director Finance but no Director Logistics, for this very reason. So much of Coal India's logistical challenges is left to the end-use industry to sort out together with Railways. Why Railways? Around 60 per cent of Railways' revenues come from one single commodity, which is coal, so Railways as an Interested Party steps into the scene to sort out logistic challenges. Economically anything above 400 km is better by Railways, in any case.
But is it the right way that coal logistics issues can be sorted out on a sustainable basis. Well no, because logistics plan of Coal India on its outbound must marry with the logistics plan of Railways, which also moves scores of other stuff; at the end of the day the movement must be optimized such that we have overall net gain from the allocation into the various commodities.
This year, we have seen from April to June, higher allocation of rakes to the coal sector on ad-hoc basis, which instead of increasing the coal movement by rail, actually brought down the actual movement of coal in tonnage terms. This was because empty movement increased over longer leads and the overall feed into the coal sector got reduced.
If one looks at coal traffic by rail in the recent years, FY16 and FY17 had actually seen lower per cent movement in Ton-Km share (44 per cent in FY15, 43 per cent in FY16 & 40 per cent in FY17). Most spillover to the road is uneconomical with higher losses and theft. What has been alarming is the rise in the cost recorded in Rs per tonne KM, which has grown exponentially from 1.6 to 1.9 in a span of three years.
Logistics is not just moving stuff, but moving it efficiently and economically. If the cost of moving coal increases by 15 per cent YoY, this raises the cost to the end-user straight away and it is the rising trend of these costs which is alarming. It comes from the four specific dimensions:
-Tariff increase by rail
-Cost of congestion
-Cost of demurrage and detention
-Cost of alternative arrangements due to non-availability at the stipulated time The solution to these issues lie in a holistic approach of Coal India and Railways to marry their logistics plans and ensuring that the projects undertaken for doubling of lines and investing in wagons happen in the areas where this is topmost priority. The new auctions would open up new traffic or a reallocation of coal movements, this should be integrated with the logistics plan of railways as well.
On per capita basis coal consumption in India dwarfs the other comparable nations, it is not because there is a demand issue. There is a supply issue, if we have to reach China's level one day, we would need four times the movement by rail from the current level of 500 MT. That is like putting logistics at the head of the priority list for Coal India, which currently may not be even in the list at all, being looked after by other Ministries and departments.
ABOUT THE AUTHOR:
Authored by Procyon Mukherjee, who is the Chief Procurement Officer in LafargeHolcim India and an industry veteran in the Supply Chain & Logistics space.
All the views expressed are his personal views and has no relation with the views of others or his own organization. All data used in the article is from Coal India website and from Elekore's presentation - 'India Coal Conference 2018: Insights on Coal Sector'.