Mumbai: Competition from an Indian state-run monopoly, which gets its coal mines free, may stymie Prime Minister Narendra Modi’s efforts to attract more investments into the sector.
India on Wednesday opened up coal mining to all companies, amending laws that had restricted it mainly to power and metals firms. Unlike Coal India Ltd., new investors will have to bid for the mines.
The nation is trying to increase output as new thermal power plants and steel mills boost demand at home even as the world is turning away from the polluting fuel. Last year, the government allowed 100% foreign direct investment in coal extraction amid surging imports and falling output at Coal India. The move didn’t result in any substantial investment.
Overseas companies may not rush to bid in auctions as “it takes a lot of years for state-level clearances,” said Rupesh Sankhe, a Mumbai-based analyst at Elara Securities. “And they will have to bring a lot of technological efficiencies to lower the costs to compete with Coal India.”
Domestic companies that aren’t state-owned and have their own captive power or steel plants have shown interest in auctions as it lowers the cost of the fuel, with mining costs unlikely to exceed 1,200 rupees ($16.8) a ton compared with 2,000 rupees in the spot market, Sankhe said.
Shares of Coal India advanced 4.2% in Mumbai at 1:05 p.m. local time, the biggest gain since September. The benchmark S&P BSE Sensex was 0.6% higher.
Scrapping the end-use clause in bidding for auctions addresses a key concern of global coal mining companies and shows the government’s intent to attract big-ticket investments, Ajay Kapur, chief executive officer for aluminum and power at Vedanta Ltd., said in an emailed statement. “With India finally moving to leverage its huge coal reserves, the import dependency of the country is also expected come down drastically.”
Imports surged to a record 235 million tons in the year ended March 2019 as difficulties in purchasing land for mining, delays in environment approvals and a clogged railway network combined to dampen plans to raise domestic supply.
India’s state run coal giant has been unable to meet growing demand despite abundant resources. The South Asian nation depends on Coal India for more than 80% of its domestic production and the miner has consistently fallen short of production targets in the last few years.
“While commercial mining is viewed as a threat to Coal India, we believe the concerns are overdone as we see limited fundamental impact over three to five years as supply ramp up would be back ended and incremental supply should bridge widening demand-supply gap and prevent imports from rising further,” Bhaskar Basu, an analyst at Jefferies Group LLC, said in a report.