Superficial solutions like the setting up of a Coal Regulator will change nothing

Superficial solutions like the setting up of a Coal Regulator will change nothing

NA Viswanathan, Secretary General, Cement Manufacturers Association.

In order to ensure a consistent and quality supply of coal to the cement industry, CMA has been taking a number of steps on a regular basis to ensure renewal of FSAs, and also to address issues concerning inadequate coal supplies of linked coal, constraint in coal supplies as well as the e-auction. CMA has been providing various inputs concerning coal to the government in the formulation of policies and plans for the cement sector. In an exclusive chat with ICR, NA Viswanathan, Secretary General, Cement Man ufacturers Association, (CMA) shares his views on this and other issues. Excerpts from the interview.

The Cabinet Committee on Economic Affairs has given the nod to the proposal to set up a Coal Regulator through an executive order. What is your take on this?
The Cabinet Committee on Economic Affairs allowed the setting up of an independent Coal Regulator to instill transparency and efficiency in the coal sector. The Regulator will not have any statutory status and will act only as an advisory body to the Ministry of Coal (MOC) till the final clearance is got from the Parliament for it to become a law.

With our past experience, we can state that for coal consumers, there is hardly any reason to rejoice over the setting up of a Coal Regulator without investing the institution with statutory authority. The coal quality issues are not likely to be addressed as it is apprehended that Coal India and Singareni Collieries (SCCL) will continue to exploit its market monopoly to dictate one-sided terms of the fuel supply agreement, without giving due consideration to the interest of all stakeholders. Superficial solutions like the setting up of a Coal Regulator to oversee the functions earlier assigned to the Coal Controller will change nothing.

What is the current demand- supply scenario for coal and where are we headed?
The supply of coal to the cement industry through linkage was as high as 75 per cent of the total procurement in 2002-03, which has gradually come down to 35 per cent in 2012-13. The steep reduction in percentage supply has taken place due to:

(a) Change in coal distribution policy due to which only 75 per cent of the normative requirement of cement industry is to be met through FSA/linkage instead of the earlier 80 per cent;
(b) Delay in signing of FSA between LOA holders (cement companies) and coal companies;, and
(c) Not holding of the Standing Linkage Committee (LT) meeting since November 2007 for sanctioning of linkage to new/enhanced cement capacities.

During the FY 2012-13, the coal requirement of the industry was about 44 M.T i.e, about eight per cent of the total coal production of 558 MT in the country. However, the industry was supplied barely around 16.5 MT of coal from CIL/SCCL against the coal linkage through fuel supply agreements i.e, three per cent of the coal produced in the country. The balance fuel requirement of the cement industry had to be met through the imports, e-auction, and purchase from open market, as also usage of alternative fuels like pet coke and lignite at a higher price varying between 35 per cent and 55 per cent.

What are the issues in allocation of coal linkages/coal blocks? What are your suggestions to iron out these issues?
Since 20 November 2007, no meeting of the Standing Linkage Committee (long-term) has been held for the cement sector, for sanction of linkages for kilns and its captive power plants. A large number of cement plants have since submitted their applications for the cement kilns and captive power plants to the Ministry of Coal (MOC) for sanction of long term linkages.

Based on the details of the pending applications of our member cement companies as reflected in the website of MOC, seeking sanction of Long-term Linkages /issuance of LoA, the total quantity involved for kilns and CPPs of our member cement companies as on in December 2012 (as given in Table - 1).

From the above, it will be seen that total pending applications with MOC for sanction of long- term linkages /issuance of LoAs for brown field and greenfield capacities of our member companies number 131, requiring around 52.40 million tonnes of coal.

It is not out of place to mention here that 16 linkages for our member cement plants, which were granted in 2007, have not yet fructified into FSA despite fulfillment of all stipulated conditions. What is more, these units are already in operation and are suffering for want of coal.

It is understood that a large number of LoAs of power, steel, cement kilns and CPPs have been cancelled involving huge quantity of coal, which is reflected in the coal balance position of the coal companies. Therefore, the coal available on this account, which is definitely more than 12 million tonnes, can be reallocated and sanctioned for the cement and CPPs of member units as per the seniority, which have been waiting for more than six years.

In terms of the Notice reference No. 13016/47/2008-CA-I (Pt.) dated 30th May 2012 issued by the Under Secretary to GOI, MOC, 54 coal blocks were identified and earmarked for various sectors for allocation through competitive bidding. Out of 54 coal blocks, seven coal blocks were identified for the cement sector (as shown in Table-2).

Coal Blocks Along With Coal Reserves

The CIL and SCCL are unable to meet the entire coal requirement for the cement sector and consequently, in such a scenario, it is essential to award sufficient coal resources to cement sector to ensure availability of cement to maintain country's infrastructural growth.

The CMA, therefore, seek allocation of more non-coking coal blocks for the cement sector at least to the extent of 636 million tonnes as accepted in the Notice issued by the Ministry of Coal on 12th May 2012. Further, additional coal blocks of non-coking coal blocks should be made available for the cement sector to mine by the open-cast mining method for a higher recovery of coal.

Is there any move from CMA to ensure priority linkage for the cement sectors as is the case for the power and fertilizer sectors?
Yes, CMA has been requesting this from time to time, through its interface, representations, with the senior officials in the Ministries of Commerce & Industry, Department of Industrial Policy & Promotion; Coal; and has even taken this up with the Cabinet Secretary to accord the same priority to the cement sector as accorded to the power and fertilizer sectors, as cement is also a core sector industry.

What is the present fuel requirement of the industry both for cement, production and captive power plants?
In terms of the Report of the Working Group on Cement Industry for the 12th Five- Year- Plan constituted by the Planning Commission, the total coal requirement for cement and CPP under high scenario (growth projection from 9 to 10.75 per cent) is 46.2 MT for cement and 17.8 MT for CPP totalling 64 MT for the FY 2012-13. In the terminal year of the XIIth Five Year Plan i.e, 2016-17, the coal requirement indicated in the the report is 69.3 MT for cement and 26.6 MT for the CPP totalling 95.9 MT.

There is a deficit of about 65 per cent of the fuel requirement. To meet the fuel requirement of the cement industry, the government could consider the following suggestions:

  • Sanction of long-term linkages against the cancelled LoAs of all other sectors without having any impact on the coal balance position.
  • Allocation of coal blocks, which will not meet immediate requirement of coal as the gestation period of coal production varies from 3-5 years from the date of allocation.
  • Liberalising import of coal without levy of custom duty.
  • Introduction of new players through the public- private partnership mode in the coal sector which would be beneficial to the sector as a whole.
  • Opening the coal industry by amending the Coal Mines (Nationalisation Act) 1973. The Bill is pending with Parliament. The Ministry of Coal could take up with the government for early passage of this Bill in the Parliament
  • Relaxation in the terms and conditions regarding disposal of surplus coal from the captive coal blocks.
  • Setting up of a Statutory Coal Regulatory Authority that will act as a watchdog for coal pricing mechanism in India.
  • Single window clearance for coal projects.Need to enhance usage of alternate fuels like petcoke, municipal waste, etc, and waster heat recovery through co-generation by encouraging and incentivising them.

What is the scenario today as far as the allocation of higher grade coal blocks? Do we need change the bidding format?
In the new policy recently announced by the MOC, inviting applications (NIA) for allocation of area containing coal through auction by competitive bidding for specified end user plants, only three coal blocks are now being offered for auction by competitive bidding for mining, to companies engaged in production of steel, cement and sponge iron, as against eight coal blocks offered earlier. Out of these three, only one coal block is being offered to the cement sector.

It can be seen that the government is likely to fail on all counts as it still retains the discretionary power to allot coal mines under the new auction policy. This is because the price of coal mines under the new auction policy will be controlled by the MOC and the coal blocks will be allocated without competitive bidding in the open market, which may ultimately lead to preferential treatment. The cement industry could, therefore, plead for a transparent system of allocation of coal blocks which would eliminate any possibility of arbitrariness in allotment of the blocks.

The request for a proposal document and a coal mine development and production agreement prepared by the MOC need certain modifications and further clarifications in the interests of objectivity. The request for proposal document has been put on sale for Rs.2,00,000 for each coal block, with effect from February 26, 2014.

To what extent is the consistent supply of quality coal pivotal to containing production costs?
The consistent supply of quality coal to the cement industry certainly plays a major role in containing the production cost of cement considerably. However, the industry has been supplied with poor quality of coal on a regular basis, with extensive variation in the declared GCV and the actual GCV measured at the cement plant. CMA, therefore, strongly recommends that an independent third party sampling facility be extended to the cement industry as well, on the same lines as adopted for the power utilities and for other consumers having ACQ equal to 4 lakh tonnes and above from October 1, 2013.

What is the impact of the prevailing import tax/CVD on controlling the fuel costs?
The cost of imported thermal coal has gone up between Rs 75 per tonne to and Rs 100 per tonne due to the changes in the budget proposal, leading to a higher cost of cement production and captive power generation. In the Budget 2013-14, the government imposed a 2 per cent customs duty and a 2 per cent countervailing duty on thermal coal. Earlier, it was just 1 per cent CVD which could be claimed back by the company importing the coal. Uncertainties' prevailing in the availability of imported coal and also its transportation costs, is having a major impact on fuel costs for the cement industry. Therefore, the government. should consider the withdrawal of custom duty and CVD on coal imports due to the huge gap in the domestic coal availability and its demand.

What is behind the poor quality of thermal coal available in India, mostly E and F grade coal?
The main reason behind the supply of poor and inconsistent quality of thermal coal in India by the government owned coal companies is due to the fact that the production targets are assigned by the MOC in quantitative terms and not in terms of the average realisation against per tonne coal produced.

Therefore, this insistence on production targets acts as an incentive to coal-producing companies to mix extraneous material and over burden, in order to achieve the quantitative production target assigned by the MOC. The presence of extraneous material, boulders and over-burden in the coal produced cannot be crushed and washed. Therefore, the coal companies are compelled to supply uncrushed and unwashed coal to the consumers. These defects in the system can be rectified by adopting targets in terms of overall GCV realisation per unit instead of quantitative production targets. Further, coal sampling at both loading and unloading ends should be undertaken by an independent agency under the direct control of a Coal Regulator/MOC.

To what extent do inadequate extractable reserves of coking coal impact the industry?
It has no impact on the cement industry since it uses only non-coking coal for clinker production and captive power generation.

We are yet to tap the huge potential in underground mining. What are the major issues in this regard?
It is learnt that underground coal production is turning out to be uneconomical proposal for CIL & SCCL due to various factors.

Productivity from underground mines in India is very low compared to open- cast ones due to an unscientific approach in mining. Capital cost per tonne for underground mines is also much higher than an open- cast mine. It is understood that efficiency has been consistently lower across all subsidiaries of CIL. There is, therefore, an imperative that scientific mining practices should be adopted in the country to tap the potential of underground mining.

What important role can private investment play in the supply chain of coal to increase efficiency and the productivity?
The PPA model of coal mining declared in the last Budget has so far not succeeded due to the stringent conditions imposed by the coal companies. Even MDOs (Mine Development & Operations) have not so far succeeded because of the unilateral conditions imposed by the coal companies. The only answer lies in the de-nationalisation of the coal industry.

What are the structural impediments faced by private players because of the public sector monopoly?
CIL enjoys various inbuilt benefits that have accrued to it for over 38 years of restricted protection. Since coal mining projects by their very nature have high costs, benefits put new entrants at a disadvantage in terms of cost of production, price and profit. The benefits enjoyed by CIL include possession of the available geological data, monopoly over the infrastructure like railway sidings and other infrastructural facilities. Coal distribution and logistics are in the hands of coal companies and the railways both having a monopoly, which leaves little scope for the private players` participation in the supply of coal and its distribution.

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