Who Will Bring Home the International Coal into India?

Jan. 1, 2013 - PRLog -- Dr. Chandan Mitra, a Member in the Indian Upper House of Parliament, had a pointed question for the Coal Minister, Pratik Prakashbapu Patil, in Parliament last week.

“Is it a fact that the International Coal Ventures Private Limited (ICVL) has, till date, not been able to finalize a single deal for acquisition of coal mines abroad during the last three years?” he asked.

Dr Mitra may have been just been playing politics as usual in Parliament. He represents the main opposition party, Bharatiya Janata Party. But his question had as much angst as it had politics.

The Coal Minister responded but didn’t really answer.

“ICVL continues to be aggressive in its efforts for making suitable acquisitions where coal quality, size of the reserves and other logistics are favourable for making investments, keeping in view an acceptable level of returns on investments,” the Minister replied.

In short, three and a half years after it was formed, ICVL was still looking.

There is a new urgency in acquiring coal assets abroad. Imported coal is now recognized as a key part of India’s energy need. Not just in the short term, but as a longer-term strategy. This view is now officially sanctioned and has political cover.

There’s just one problem. Who will bring home the international coal?

Several Indian companies were involved in a wave of international acquisitions a few years ago. The deals were varied, from purchase of a stake to development of new blocks, including a bruising environmental battle in Australia that delayed production five years.

The acquisitions stretched primarily across Indonesia, Australia and South Africa. Bigger Indian companies, including Tata, Reliance, Adani, GMR, Gujarat NRE, GVK, Lanco, Essar, Jindal Steel and Power, led the pack. These companies invested about US$40B in the initial round of acquisitions.

The purpose of the acquisition was to bring the supplies back home to fuel their power and steel plants. Most of the companies were not miners at their core. They were not interested in trading internationally. International acquisition, they reasoned, would provide secure supplies and stable prices.

Those benefits have not been fully realized. International acquisition hasn’t translated fully into secure supplies or stable prices back home. Tata and Reliance, for instance, are both in a complicated process of having to renegotiate the power purchase agreements of their ultra-mega power plants as a result of changes in Indonesia’s law on exports that pushed up prices.

Both companies had bought stakes in Indonesian coal companies but the regulatory change still changed the economics of their 4,000 MW coal plants. Reliance has suspended work at it Krishnapatnam power plant pending outcome of renegotiations (or arbitration). Tata Power took an impairment charge of $330M for its Mundra plant in the last fiscal year.

Tata has remained undeterred, though. This summer it announced acquisition of 26% in the Indonesian mining company PT Baramulti Sukses Sarana Tbk (BSSR). The deal evolved out its long-term supply agreement with BSSR’s subsidiary, PT Antang Gunung Meratus.

“We recognise fuel security as a key to support our growth agenda. This acquisition would aim to support our power generation projects in select geographies,” Anil Sardana, Tata Power’s Managing Director, said after the BSSR acquisition was announced.

It began in earnest with Tata’s announcement of the BSSR deal. Abhijeet Group followed with a larger than life $7B, 20 year deal to bring thermal coal from the US, though nobody quite believes that one just yet. Smaller tactical acquisitions, like Monnet Ispat’s expected purchase of a Colombian mine, are likely to follow.

There is tremendous pressure on Indian companies – private and state-owned – to start bringing the goodies back home. But this time around, there is greater appreciation of the risk that foreign governments may be more fickle than their own.

Creative supply-linked, rather than ownership-based, deals that understand domestic Indian imperatives on supply security and price stability should find lots of ready Indian customers.

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