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Selling coal to India

3 November 2011 By Jeff Glekin

India looks set to keep searching for overseas coal. Though the country has the world’s fourth largest reserves, environmental restrictions mean production is struggling to keep up with demand from coal-hungry power stations. That explains why Indian firms like Aditya Birla Group, which is considering a bid for Australia’s $5 billion New Hope, are gobbling up overseas acquisitions.

Business argues government is to blame. Last year the former environment minister declared a third of coal reserves “no-go” areas. The policy has since been reversed, but regulatory clearances for new mining projects remain hard to come by. Coal India, supplier of 80 percent of the country’s coal, may miss its supply targets for the current year. Power stations are running low on stock. The coal ministry projects a supply shortfall of up to 30 percent of its 2012 target.

While the industry is right to push for a resolution, the government has two legitimate concerns. First, coal reserves are predominantly located in densely-forested areas. Second, these areas are often inhabited by poor tribal communities. A new mining bill, which is yet to be passed in parliament, proposes firms share 26 percent of their earnings with the tribal communities they displace. That helps deal with the latter problem. But the government must still come up with a better environmental policy to replace the short-lived “no go” areas.

In the meantime, Indian companies are looking abroad. Even excluding Birla’s interest in New Hope, groups have spent $10 billion this year on foreign mines. Though the quality of imported coal is better, it costs three times as much as the domestic variety. When the difference in quality is factored in, it is still 45 percent cheaper to use Indian coal to generate electricity. The more India relies on imports, the higher its electricity costs – though that is still preferable to power shortages.

However, even if India can resolve its environmental issues it is not likely the country would fully reverse the trend towards coal imports. While domestic supply may look cheap, new sources of coal are buried deeper underground, and speculative reserves require further exploration. Bringing new domestic supply on stream will still drive up prices. India’s overseas coal-buying spree looks set to continue.


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