CIL asks Railway Ministry to come up with a Roadmap for Coal Evacuation

Under this proposal, railways will be issuing tenders to purchase rakes on behalf of Coal India as well as deploy the coal corridors & advanced technology!

NEW DELHI: State-owned Coal India has sought a roadmap from the Union Railways Ministry which will help the company possess its own network of railway corridors and rakes which it feels will help in reducing its dependency on railways for transporting coal.

Shortage of railway rakes has been an ongoing concern for the entire coal consuming sector. Towards the end of 2017, when the power plants in the country faced a severe coal shortage issue, Coal India had boosted its supplies to stave off the crisis and increased routing railway rakes to this effort. In turn, it led to increased complaints from the steel and cement sectors – the other primary consumers – as coal from these segments were otherwise routed to generate electricity.

According to a Coal India official, the August-December period last year was an eye-opener for the Maharatna company. So long, its primary concern was how to increase production and boost sales as well. Until June last year, it had faced an oversupply situation as coal demand remained muted. However, things changed suddenly.

Government’s recent move to allow commercial mining of coal, and notification of the methodology for auctions sets the stage for a change in India’s coal supply paradigm. But that’s easier said than done with there being a raft of structural issues that need sorting out. The hour is propitious, therefore, to scrutinise the landscape using four lenses supply, pricing, quality, and the interest of global miners.

For ages, the supply side has been a story of delays in approvals, land acquisition, and rehabilitation of project-affected people. Of the 89-odd coal blocks auctioned under the new regime in the past three years, only a handful have started operations. A number of Coal India projects, too, are delayed.

It takes at least 5 years for a coal mining project to start commercial operations. Unless there is single-window clearance for statutory approvals, streamlining of land acquisition processes, and improvement in rail connectivity, commercial miners would run into the same challenges that have beset public sector and captive miners.

Sorting these requires political and regulatory drive. Without that, the coal supply curve is unlikely to turn for the better anytime soon. That means pricing would continue to be determined by Coal India and Singareni Collieries till the share of commercial miners in the output increases and supplies improve.

The official noted that it was only a matter of days when Coal India realised that besides upping its production, it needs to focus on building its own logistical capability.

“We have always been working jointly with Railways to supply coal and the synergy increased during times of the power crisis last year. But then we realised that it is much better for us if we have our own logistical network”, the official said.

Nevertheless, the company, which is on a diversification drive now, also realised that without the support of railways, building the rail network is impossible.

“We have thus asked railways to come up with a plan for the future which will not only help Coal India to seamlessly supply coal but if we are able to purchase our own rakes, it would free up Railways’ rakes allocation to other sectors as well”, the official added.

Under this proposal, railways will be issuing tenders to purchase rakes on behalf of Coal India as well as deploy the coal corridors and new-age technology based wagons like high-tensile aluminium wagons can be procured.

Already its major coking coal producing subsidiary, Bharat Coking Coal is putting up new railway lines at an estimated cost of Rs 2.34 billion, which will help evacuate 25 million tonne (mt) of additional coal every year. Central Coalfields, which is challenged with remote mines, has deposited Rs. 9.12 billion last year with railways for lines upgradation and extension work.

South-Eastern Coalfields, its second largest coal producer is also estimated to have spent Rs 3.74 billion last year on improving evacuation facilities. Mahanadi Coalfields, its largest subsidiary has also already spent Rs 11.27 billion on improving railway logistics.

Western Coalfields which caters to the western part of the country where the power situation had once worsened last year, has also spent Rs. 116.53 million to improve its railway infrastructure in Maharashtra alone.

Preliminary findings have revealed that Coal India may need to spend around Rs 200 billion to build its railway logistical capability which may drain its monetary reserves. However, a company official stated that since rake procurement, as well as construction, of the coal corridors will happen in phases, Coal India’s capex may not increase more than Rs. 15 billion in a year.

Coal India’s rake loading per day during April this year to the entire coal consuming sector grew by 10.4 per cent as it loaded 245.7 rakes on an average compared to 222.6 rakes per day during April 2017. However, increased demand for rakes from Coal India reduces its availability for other sectors. In January this year, the union steel ministry acknowledged the problem and stated that it is in talks with the railways ministry to sort out this issue.

Northern Coalfield 900
Eastern Coalfield 131.14 *
South Eastern Coalfield 3740
Bharat Coking Coal 2336.5**
Western Coalfield 116.53
Mahanadi Coalfield 11270 ***
Central Coalfield 9120.6

While pricing may not become competitive in the near-term, commercial mining would certainly pave the way for pricing based on energy content, or kilocalories the international practice compared with the grade-wise schedule applicable now. For the power sector, which consumes more than 80% of domestic coal, a material reduction in purchase costs is unlikely because commercial miners would tend to target customers that are meeting their needs from more expensive sources. Also, given that the bulk of the power generation based on coal linkages from PSUs is locked in long-term PPAs, any switch to a different coal source won’t make sense sans a material reduction in energy charges.

Then there is the vexatious issue of coal quality. Power companies have been complaining of stones and boulders in coal consignments for long. The issue is unlikely to get resolved soon because Coal India will remain the largest supplier for years. In the future, however, it is fair to presume, commercial miners could offer more reliable supplies.

As for mine auctions, success would depend on the quality of the blocks being offered and the geological information made available to bidders. To attract global players, extensive geological information on coal blocks, promise of scalability and adequate evacuation infrastructure are imperatives. Success would also depend on the consistency of regulations and security of tenure. The spate of cancellations of coal and iron ore mining projects in the recent past, and embargoes on production in certain cases through judicial interventions, have made the whole proposition riskier.

The upshot is that commercial coal mining will not lead to a drastic increase in supply in the next 7-10 years as structural glitches are ironed out. As for pricing, while the cost structure of mines will have a bearing given the coal deficit scenario in the country, quotes by commercial miners would tend to be higher.

For sure, commercial coal mining will expand domestic supplies and set new benchmarks in mechanisation, automation, good mining practices, and therefore drive up productivity. It may also lead to flexible supply contracts and pricing. And as calorie-based pricing becomes a sine qua non, and as supply expands, other quality parameters such as ash and sulphur content would also become important determinants of the price discovery process.