India coal summit

\

2nd India Coal Summit

Coal: A reliable and competitive source of Energy

October 5, 2009

Knowledge Partner Organiser

Contents A1. Coal at a glance 2

A2. Status of captive coal mining in India 10

A3. Coal mining policies need an overhaul 13

A4. Assets abroad – key for meeting Indian coal demand 16

A5. Will the new Indonesian mining law allow Indonesia to

continue as India’s largest coal supplier? 19

A6. Logistics – major contributor to development of coal sector 24

A7. Minerals or forests? or both? 31

A8. Major challenges before coal industry 32

A9. Risks in coal mining 37

A10. Importance of branding for coal mining companies 44

1

Foreword

This past year has been the worst global financial crisis we have ever witnessed, having a devastating effect on the world financial markets, leading to a recession across most economies globally and causing a reduction in the net worth of both companies and individuals. Many compared it to the Great Depression of 1929. The global de-leveraging and de-risking process also led to sharply declining commodity prices. However, in the past several months, China and India have continued to show a strong appetite for commodities, in particular Coal.

The Coal sector of any country is vital for power generation and overall industrialization of any nation. This is particularly the case for India, wherein Coal contributes to more than 53% of power generation. While India continues to produce a majority of the Coal that it consumes, the imports of Coal are raising at a fast pace, already contributing to over 10% of Coal consumption. It is therefore essential for all the stakeholders in the industry to brainstorm on the improvements required to ensure sufficient quantities of Coal availability at sustainable prices.

There are a number of historic practices in the Coal sector in India which need to be looked at afresh in the light of developments both in India and overseas. For example, a large volume of Coal continues to move from Eastern Region by coastal movement to Tamilnadu & Karnataka, whereas these States may be better served through imports of Coal, thereby freeing up Port and Railway capacity in the Eastern Region. There should also be some rationalization in allocation of Coal Blocks to the upcoming Power Plants such that the logistics of Coal movement is streamlined, which will be beneficial not just for the developer of the Power Plants but also in the interest of the nation.

The Ministry of Power, Government of India is setting up a target of almost 1,00,000 MW of capacity addition for the 12

th Five year plan, Steel ministry envisage India to produce 300 million tonnes of

steel by 2030. The kind impetus given to the entire infrastructure sector, it will invariably create huge demand for coal.

Keeping in view the importance of this sector as a key driving force of the Indian economy, Indian Chamber of Commerce along with the Ministry of Coal, Government of India is organizing 2

nd

India Coal Summit in New Delhi after the commendable success of 1st India Coal Summit held last

year.

The summit has been the ideal forum to raise policy issues and to interact directly with the decision makers. The forum in past has seen the presence of most relevant industry players and government authorities debating the issues of national interest. We are sure that this year once again we will raise important issues which will be the key to enhance industry competitiveness.

Shri Vishambhar Saran

President – Indian Chamber of Commerce

A1. Coal at a glance

1.1 World coal scenario

Coal is the world's most abundant fossil fuel source. Coal is widely distributed.

Economically recoverabl

worldwide, and in each major world region

Amongst the major energy sources, coal is the most rapidly growing fuel by

consumption on a global basis. Coal has long been used as an energy resource

traditionally for heating and power generation. However the dynamics and opportunity

set for utilizing coal is changing. There is increasing convergence and competition

amongst different value-

in the energy mix going forward.

World primary

Source:

The five major coal consumer countries which are China, USA, India, Japan and

Russia account for 72% of global coal use. A

more than half of global coal consumption. Coal plays important role in electricity

generation, steel and cement manufacturing worldwide. Currently 39 % of global

electricity is produced by coal

production depends on coal feedstock

1 IEA website: www.iea.org 2 World coal institute

35%

lance

cenario


Economically recoverable reserves of coal are available in more than 70 countries

worldwide, and in each major world region1.





-chains which means coal may have a more diverse role to play

the energy mix going forward.

rimary energy consumption by fuel – 2007

Source: BP statistical review of world energy 2008


Russia account for 72% of global coal use. Asia is biggest market of coal contributing



electricity is produced by coal-fired power plants and about 70% of world steel

production depends on coal feedstock2.

29%

24%6%

6%

Coal

Natural Gas

Nuclear

Oil

Hydro

2


e reserves of coal are available in more than 70 countries





chains which means coal may have a more diverse role to play

2007


sia is biggest market of coal contributing



and about 70% of world steel

Coal

Natural Gas

Nuclear

Oil

Hydro

There has been an increasing trend in global trade due to

developing economies. The trend is expected to continue in future. The global demand

- supply balance for coal has consistently been in shortfall

Major steam coal exporting countries in 200

(Colombia & Venezuela) and Southern Africa (South Africa, Mozambique, and

Botswana). The table below shows t

countries:

Coal exporting

Indonesia

Australia

South Africa

Colombia

1.2 Coal scenario in India

Coal is the predominant source of energy in India and it has significant contribution in

the rapid industrialization of the

important source of energy fo

cement, fertilizers and chemicals are major coal consumers. Coal contributes to about

55% of commercial energy consumption of the country

India is shown below:

Source:

3 Ministry of Coal, Government of India

Coal Oil

There has been an increasing trend in global trade due to higher consumption from the


e for coal has consistently been in shortfall recently.

Major steam coal exporting countries in 2008 are Australia, Indonesia, South America


The table below shows the export of coal by major

xporting countries 2008 (Million

tonnes estimated)

Indonesia 173

115

Africa 61

Colombia 74

Source: World Coal institute

cenario in India


the rapid industrialization of the country. In India coal has been recognized as the most

important source of energy for electricity generation and industries such as steel,


55% of commercial energy consumption of the country3. The primary energy mix of

Primary energy mix of India

Source: Planning Commission of India

Ministry of Coal, Government of India

53%31%

9%

6% 1%

Oil Natural gas Hydroelectric Nuclear energy

3

consumption from the


Australia, Indonesia, South America


by major coal exporting


ountry. In India coal has been recognized as the most

r electricity generation and industries such as steel,


. The primary energy mix of

4

Demand of raw coal assessed by planning commission of India for 2007-08 was

492.50 million tonnes(including colliery consumption and export) and actual availability

including imported coal (of 50 million tonnes) for 2007-08 stands at 502.76 million

tonnes. It is more than the assessed demand by 10.16 million tonnes. It is important to

note that 28.5 million tonnes of non-coking has been imported which is 18 million

tonnes more than the assessed demand.

During 2008-09 coal dispatches to steel, power (utilities), power (captive) & cement

sector has achieved 88.8%, 102.3%, 67.7% and 111.1% of targeted demand

respectively4.

Coal consumption & domestic off take

Source: Ministry of Coal

The trend represents that coal consumption has shown a 5 year CAGR of 7%, whereas

domestic supply has only managed a 6% CAGR over the same period. India is third

largest consumer of coal. Consumption is growing rapidly while production is not able

to meet the same resulting in growing deficit in coal supply. India has coal deficit

despite the fact that India has 4th largest coal reserve in the world. In the section ahead

we have discussed the demand scenario of coal in India from power, steel and cement

sector.

1.2.1 Power sector

India is the third largest producer of electricity in Asia. The power sector is the largest

consumer of coal in the country accounting for 74% of total consumption in FY08. In

India power generation capacity has grown manifolds from 1362 Mega Watt (MW) in

1947 to present 152,000 MW . The share of thermal power generation installed

capacity stands at of 97000 MW constituting 65% of total installed capacity, out of

which coal contributes 80000 MW

4 Ministry of Coal, Government of India

340359 380 397

421 452363 381409

435466

502

0

300

600

FY03 FY04 FY05 FY06 FY07 FY08

MT

Domestic offtake Total

As on 30 June 2009 the installed power capacity by different sources i

Installed p

For XI plan, thermal generation capacity target of 200 G

which implies a huge increase in future coal demand from the industry. Presently

53.3% of the installed capacity of the country is coal based. Due to uncertainty

availability of gas and its high price

popular in India.

Thermal power share is expected to increase to 145 GW in XI plan from present 86

GW and coal accounts for 57% in the installed thermal capacity. Total i

capacity for power generation including all the captive power plants is around 1,60,000

MW and it must increase to 8,00,000 MW by the end of 2031

development goals. Also, for sustaining the growth, India would require increase

production capacity from present levels to over 2 billion

domestic quality of coal. On account of increasing per capita energy consumption and

targets set for increasing rural area electrification, the demand for coal is

spur further. In long term huge opportunities exist in the power sector, considering the

demand-supply gap.

As on 30 June 2009 the installed power capacity by different sources i

power capacity by different sources in India

Source: Ministry of Power

For XI plan, thermal generation capacity target of 200 Giga Watt (GW)


53.3% of the installed capacity of the country is coal based. Due to uncertainty

availability of gas and its high price, coal based power plant are becoming more


GW and coal accounts for 57% in the installed thermal capacity. Total i


MW and it must increase to 8,00,000 MW by the end of 2031-32 to meet the human

. Also, for sustaining the growth, India would require increase

production capacity from present levels to over 2 billion tonnes per annum based on


targets set for increasing rural area electrification, the demand for coal is


5

As on 30 June 2009 the installed power capacity by different sources is shown below:

ources in India

att (GW) has been fixed,


53.3% of the installed capacity of the country is coal based. Due to uncertainty in

coal based power plant are becoming more


GW and coal accounts for 57% in the installed thermal capacity. Total installed


to meet the human

. Also, for sustaining the growth, India would require increase in coal

per annum based on


targets set for increasing rural area electrification, the demand for coal is expected to


6

1.2.2 Steel sector

Steel is essential building block for development of any country and coal is essential

input in the production of steel. India has very limited reserves of coking coal which is a

key raw material for the production of steel. The Indian steel industry has been facing

acute shortage of coal for the last several years. Coking coal accounts for only 17% of

the country’s overall proven coal reserves. The Jharia coalfield, located in the state of

Jharkhand, holds the majority of domestic coking coal reserves5.

The future demand of coal for steel sector as per Coal Vision 2025 is shown below:

Expected coal demand (in

million tonnes) 2011-12 2016-17 2021-22 2024-25

At 7% GDP 53 67 84 97

At 8% GDP 54 69 90 105

The scope for raising the total consumption of steel is huge, given that per capita steel

consumption is only 46 kg – compared to 180 kg across the world and 280 kg in China6.

Also steel consumption grew at high rate of 5.2 per cent during the first quarter of 2009-

10 as against 3.8% in the January-March quarter previous year7. The National Steel

Policy has projected steel production to reach 110 million tonnes by 2019-20 from 53

million tonnes at present. This demand for steel sector in turn will drive demand for coal.

Coking coal requirement in steel production is expected to touch over 85.34 million

metric tonnes in 2011-12.

1.2.3 Cement sector

India is second largest producer of cement in the world. Large amount of energy is

required during cement production and coal is used as an energy source. During

cement production in kiln, coal is usually burnt in the form of powder and consumes

around 450g of coal for about 900g of cement produced8.

The cement industry is the third largest consumer of coal in the country. Presently coal

is used as main fuel in cement industry in India because of high cost and inadequate

availability usage of gas and oil is not feasible. However, in last few years the specific

consumption of coal for production of cement has reduced significantly because of the

switch to the dry process, efficiency improvements in cement kilns and the increased

use of fly ash produced in power plants and granulated slag produced in blast furnaces

of steel plants in the production of cement9.

5 Ministry of Coal, Government of India 6 Ministry of Steel, Government of India 7 India Brand Equity Foundation 8 World Coal Institute 9 Coal Vision 2025

7

The Working Group on the cement industry for the XI Plan has fixed a production

target of 263 million tonnes and a capacity of 298 million tonnes in the terminal year

2011-12 of the plan. According to Coal Vision 2025 the cement production in the

country has increased from 18.6 million tonnes to 123.4 million tonnes in the last 25

years whereas coal requirement has only grown from around 5.0 million tonnes to 18.5

million tonnes.

The future demand of coal for cement sector as per Coal Vision 2025 is shown below:

Expected coal demand

(in million tonnes) 2011-12 2016-17 2021-22 2024-25

At 7% GDP 38 58 88 113

At 8% GDP 39 61 95 123

The cement industry is facing problem of inadequate coal supplies queued up after the

power and steel sector in the priority list for supply. The demand from real estate and

infrastructure sector is expected to drive up the demand for cement as well. Demand of

coal from steel, cement and other sectors must grow to meet the human development

goals.

Other industries using coal have only a marginal impact on the long term demand for

coal as they are relatively small players and can resort to alternative fuels.

Coal demand-supply deficit in India has been consistently increasing and is expected

to grow further. As can be seen from the table below the projected coal demand and

supply situation shows that the deficit is expected to increase in future.

(million tonnes)

Demand/Supply/Gap Sector 2011-12 2016-17

Projected

Demand

Coking Coal 68.50 105.00

Non Coking Coal 662.60 1020.00

Total 731.10 1125.00

Supply


Non Coking Coal 652.35 1020.00

Total 680.00 1055.00

Gap


Non Coking Coal 10.25 --

Total 51.10 70.00

Source: Ministry of coal

8

1.3 Coal import trend

To some extent India is resorting to imports to narrow down the demand and supply

gap. Indian consumers from both power and steel sectors import some amount of their

consumption on a consistent basis. The domestic coal supplies are inadequate to cater

to the local demand.

Coal imports in India (in million tonnes)


The trend shows that coal imports have also been increasing over the years and have

reached 50 million tonnes in FY08 (provisional statistics, MoC) registering a CAGR of

20% over past five years. Following are some of the factors which have been cited as

the reason for an increase in the imports of coal in India:

a) Indian coal is inferior in quality. Sometimes there’s a high ash content and low

energy content, so imported coal is used to blend with local coal as a way of

lowering the ash content and increasing the energy content.

b) Domestic rail transport in India can be a constraint on the movement of coal from

producing to consuming regions; so distance and reliability can make it more

cost-effective to actually import coal.

c) Over the last few years, demand for coal, particularly for thermal coal has

increased at a much faster rate than supply has increased.

0

10

20

30

40

50

60

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Shortage in coal stocks at power projects is likely to get worse if the coal

production and transportation planning are not effectively managed. The

capacity constraints in transportation, added with seasonal disruptions, have led

to critical levels of coal inventories at power projects.

New project implementations in coal mining have suffered substantial delays

and have led to demand and supply mismatch.

9

A number of Indian companies are resorting to coal imports from Indonesia. Companies

like Tata Power Co. Ltd, Star Emmsons Resource and PTC India Ltd have struck deals

or are planning to do so for securing coal resources or supplies from Indonesia.

Securing coal supplies from abroad may require outright purchase of coal mine or

equity stake in the coal mining company and signing long-term contract with this

company. In the international coal markets, supply contracts rarely have tenures of

more than four-five years, but buying sizeable equity stakes can facilitate long-term

supply contracts being signed.

10

A2. Status of captive coal mining in India

2.1 Need for captive mining

The need for captive mining in India can be better comprehended by having a glance

at development of coal mining industry.

Pre-Nationalization - most of the mines were privately owned. There were concerns on

safety and occupational health in the light of which Government of India decided for

nationalisation of coal mines

Post-Nationalization - Under the Coal Mines (Nationalization) Act, 1973 coal mining

was mostly reserved for the public sector. National Coal Development Corporation

/Coal India Limited (CIL) became the central agency for mining coal.

In 1976 captive mining was opened up for private companies engaged in production of

iron and steel. Sub-lease of coal mines in isolated small pockets not requiring rail

transport was allowed.

In 1993 captive coal mining was opened for power generation companies and for

washing of coal obtained from a mine. The idea was to expedite coal production from

sources other than CIL to feed coal to the power plants as coal fired power contributed

majorly to the power generation in the country as it was difficult for CIL to match the

increasing demand of coal.

It was felt that private participation in coal mining may ease the increasing pressure of

the widening gap between demand and supply of coal in the country. Private sector

would also bring in much needed capital for investment in the sector.

2.2 Current status

Out of 122 coal blocks allocated between 1993 and 2006, less than 20 mines started

production. With the ambitious plan of the Government to add 78000 MW power

generation capacity by the end of XI five year plan, it was envisaged to produce 104

million tonnes per annum coal from coal blocks allocated for captive use, but the

production from the captive blocks has been dismal compared to the planned

production. Recently (in 2006), MoC has come up with the requirement of submission

of bank guarantee linked to milestones of coal mine development by allocatee

companies as a measure to bring in seriousness. The intent of the government seems

to be to penalize the non serious players who have got coal blocks allocated and are

not making any progress for development of the coal blocks. But the reasons for delay

in developing mines need a closer scrutiny.

11

2.3 Reasons for delay

Analysis of the pending milestones for coal blocks allocated till 2006 (whose target

year of starting production is in or before 2009) reveals that most of the delays are on

account of land acquisition and forest clearance. Of the recent ones grant of license for

prospecting has been delayed. The table below summarizes the status of the allocated

coal blocks with the milestones still pending in these cases:

Year of

allocation

No of blocks

allocated

Target year of

starting

production

No of blocks

started

production

Major

milestones

pending

1993 – 2003 40 1996-2007 20

Forest

clearance, land

acquisition and

environment

management

plan

2004 5 2008 0

Land acquisition

and forest

clearance

2005 24 2008-09 to 2011 0

Forest

clearance, land

acquisition and

environment

management

plan. In some

cases there is

no progress

2006 53 2009-12 0

PL not yet

granted in many

cases. Almost

all lagging on

timelines


Although there may be cases where delays are due to non-seriousness of the coal

block allocattees and the introduction of bank guarantee and risk of de-allocation are

welcome moves by the government, efforts are still required to enable the serious

players who intend to develop the mines in time to do so. The efforts are required to be

made in the following areas:

12

2.3.1 Streamlining grant of permits, licenses and clearances

Involvement of multiple entities in granting most of the permits, licenses and

clearances is proving to be one of the greatest hindrances in speedy execution. Often

these agencies involved have conflicting interest and priorities due to which the

chances of lingering the grant of licenses and clearances get enhanced. Feasibility of

having nodal agencies in place for these activities should be looked at to streamline the

process of approvals which can save precious time and help us gear up to meet the

challenge of growing coal demand by timely development of coal blocks.

2.3.2 Comprehensive and acceptable land acquisition and R&R policy

The sooner the consensus developed on a comprehensive land acquisition and R&R

policy the better it is for the coal industry or for that matter any other industry requiring

land acquisition. Clearly, this is one single issue which is contributing to most of the

delays in not only coal mine development but any major project involving land

acquisition.

Apart from these reforms, a more liberal view needs to be taken up to open up the coal

sector further for participation by private and foreign players. This will also bring in

much needed capital for investment in the sector. Entry of major mining companies will

bring in world class mining practices and better competition which will be beneficial for

the coal mining industry. But before we move to a higher stage, the decision of going

for captive mining needs to be proved worthy by bringing in the much needed policy

reforms and boost production from captive blocks.

13

A3. Coal mining policies need an overhaul10

Coal mining sector needs structural overhaul to attract investments that can help the

sector meet growing needs for raw material for power, steel, cement and other usages.

The sector has been traditionally dominated by the government-owned companies and

with limited participation from the private sector. In the current financial crisis this may

have been a boon as the government-owned companies have healthier cash positions

to keep their capital expenditure plans intact. But there is no denying that private sector

participation is a must for augmenting coal production. The Government has indeed

made strides in this direction by allowing captive mining for various approved end

usages. However, there is a need for streamlining the allocation process as also a

need to monitor the progress of project implementation more closely and facilitating the

process.

Government may provide roadmap for amendment to MMDR Act to ascribe

marketability to prospecting and mining licenses will help the sector reap risk capital

and will make exploration a sustainable business for private investment. Government

may also facilitate creation of alternate investment market that will provide much

needed funds to support prospecting and exploration activities. For this the capital

markets need to get prepared as well. Disinvestment through IPO routes and

enhancing public floats in listed coal mining companies may enhance the market depth

for mining sector investments. Traditionally, Indian mining sector has not been

attractive for private equity (PE) firms due to challenges unique to the industry. In India,

private sector companies that could potentially be targets for PE funds, have had

restricted participation. The miners have traditionally been price takers till recently and

have, even globally, underperformed the markets. There are talks of institutionalizing

regulatory mechanisms for pricing coal. All these developments put together, financing

coal mining projects may present unique challenges.

Political and social issues have become more prominent than ever, with cases of state

governments asserting their rights over mineral properties and societies around

mineral deposits resisting mining activities quite vociferously. A consequence of these

is also the reputation risk, where a Machiavellian wisdom may lead to impairment of

brand. Government may need to devise a policy for better settlement of land

acquisition issues as much as the industry needs to consider sustainable coal mining

with a clear view on social vale addition.

Incentives may be provided to encourage innovation and adoption of cutting edge

technologies, more so in coal mining sector where the cut-off depth is likely to require

capacity additions in underground mining. Underground mining can serve the purposes

of environmental risk mitigation and quality consistency. However, the economics of

underground mining are not so favorable when compared with the surface mining

methods. The constraints are also from the productivity perspective. In India the

productivity of underground mines traditionally has been fairly low. From the mineral

conservation perspective, bord & pillar method of underground mining has been quite

10 Dipesh Dipu, Principal Consultant, PricewaterhouseCoopers Pvt. Ltd., India; email: [email protected]

14

inefficient with coal recoveries as low as 35-40%. Longwall mining method, although

more efficient and mechanized, has not been quite successful in India due to highly

faulted geological conditions in Indian coalfields. Strata control has been difficult too in

longwall mining. However, with environmental concerns being more and more

important, it may be worthwhile to consider underground methods with mass

production capacities. The underground mining methods are also expected to reduce

procedural delays due to lower environmental damage and lower land requirements for

waste dumping, and others. Also, government on its part may like to provide fiscal

incentives, including but not limited to reduction in duties on capital equipment.

Competitive bidding for mining license allocations has its pros and cons. The method

will enhance transparency and objectivity and may have inherent commercial

mechanism to hasten project implementation. The current methods of allocation on

point scale on a host of variables ranging from net-worth to extent of completion of the

end use projects, and with recommendations from several stakeholders, have inherent

subjectivities. This approach may not suffice the purposes of most efficient usages of

coal, their conservation and earnings for the government. The point scale basis

becomes ineffective when the number of applications is large. The 750 applications for

18 coal blocks identified for power sector in the last round of allocation is a case in the

point, where the parameters chosen for development of scale resemble qualifying

criteria and make it almost impossible to decide on allocation without a fair bit of

subjectivity. Competitive bidding is likely to result in objectivity. Depending upon how

these are structured (initial bullet payment, production sharing, revenue sharing or

profit sharing) there may be cost implications. But looking at the bigger picture and the

urgency to develop new mines, the pros certainly overweigh the cons. Government

also needs to then de-risk the mining projects from delays due to approvals and

clearances required to make the assets lucrative investment targets.

Proposed coal regulatory mechanism is unique to India which has its roots in the coal

market structure and energy affordability. Pricing of coal by the government owned

coal producing companies have thus far been opaque, even though prices have been

lower than the international prices on energy-equivalence basis. The absence of a

vibrant market with large number of buyers and sellers coupled with supply constraints

have made fair pricing a difficult proposition in the Indian context. The policies

framework should aim at a market driven pricing mechanism, however, till the time it is

established, coal regulator may be required.

There are other technologies that can complement traditional coal mining activities and

help India secure its energy needs. Underground coal gasification (UCG) is one of the

key technologies which can also help tapping coal resources that cannot be mined

economically with the existing mining technologies. It has been assessed that coal that

are deep seated, particularly so the tertiary reserves in Gujarat, are amenable to

underground gasification. This method of energy extraction from coal reserves will not

be competing with the coal available for other purposes and will only convert a

potential into exploitable resource. UCG also will provide energy with minimum surface

disturbance and no requirement of surface disposal of ash. There are, however, some

unique application prerequisites for UCG like the coal seam being under water aquifer

and impervious rock bed; and coal seams being relatively uniform and un-faulted. The

15

applicability of the technology, therefore, needs to be assessed in greater details in

light of the geological conditions in Indian coalfields.

Coal-to-liquids (CTL) and coal-to-gas (CTG) conversions are now included as

approved end-usages for captive coal mine allocation, and recently, two coal blocks

have been allocated for these purposes. The technologies have been commercially

proved globally and can help India reduce oil imports. According to some media

reports, coal conversion to petroleum products becomes economically viable if the

crude prices are above a certain threshold for a barrel. In light of the recent peak prices

and future expectations, the CTL technology appears viable. Production of petroleum

products from coal will reduce country’s import dependence particularly so from the

politically unstable locations. Production of intermediate syn-gas can be useful even for

fertilizer production and replace usage of naphtha.

The other prominent ways of extracting value from coal are coal bed methane (CBM),

coal mine methane (CMM) and abandoned mine methane (AMM). In India, CBM has

been more successful than the others. Recently, first CBM based CNG gas station has

been reported to be opened in West Bengal, which is likely to enhance investor

confidence. Coal India Limited has also initiated the process of developing CMM and

AMM resources through public-private-partnership. It, however, remains to be seen if

the initial interest exhibited by the bidders culminates into commercial exploitation of

methane, which also is good for carbon credits.

A comprehensive policy is required to be formulated for the purpose of effective and

efficient utilization of nation’s coal resources. The abundance of coal promises to

provide energy at affordable prices and can be substitute of expensive imports to

significant extent. However, the technological and economic viability have to be

established and the government-owned agencies as well as private and foreign

participants need to be provided incentives to invest in the sector. Provision of energy

is paramount to the continued growth of the economy and harnessing coal resources is

undoubtedly one of the most important ways to secure India’s energy needs.

16

A4. Assets abroad – key for meeting Indian coal

demand

Demand and supply scenario of coal clearly indicates gap between coal demand by

Indian consumers and coal supply from domestic sources. To narrow this gap, Indian

consumers have been importing coal from countries like Indonesia, Australia and

South Africa. In previous year, India imported about 50 million tonnes of coking and

non coking coal. Even the forecasts and projections made by government committees

and agencies has indicated that supply will be short of demand for coal and Indian

consumers has to rely on import of coal. Though more than 200 coal blocks have been

awarded to various public and private consumers for captive production and use but

developing these coal blocks and starting production will take time. Looking at long

term import requirement, many consumers have tied up with coal exporters to secure

supply as well as get deals at good price. But in many of these supply agreements,

prices have been linked to some or other benchmark index. In recent times, we have

seen wide fluctuations in the prices of coal. Thus even long term supply contracts have

not proven to be fully shielded from the market fluctuations. Such conditions have led

many consumers to have their own assets which will help them checking price of coal.

In recent times, many consumers with this opinion has moved to major coal countries

like Indonesia, Australia etc. to acquire assets which will provide secured supply

source as well as economic fuel source. Further, government is promoting imported

coal based Ultra Mega Power Projects (UMPP) which will require huge amount of coal.

Each UMPP is expected to import 14-17 million tonnes of coal annually. This has made

Indian consumers to hunt for coal assets in other countries.

4.1 Deal trends across globe

Factors discussed above have lead many players to look for coal assets abroad. It is

not only Indian companies which are looking assets abroad. This is a global

phenomenon; especially countries like India and China are looking for assets. If we see

the acquisition trends, last two years have seen huge deal values. In 2008, across the

globe, there were total of 1668 transaction in mining sphere amounting to USD 153.4

billion. Though later half of 2008 saw a dip in transaction still total deal values were

nearly same as in year 2007. Year 2007 witnessed huge transactions amounting to

USD 158.9 billion. Even in the global financial turmoil, Asia Pacific region recorded

growth in the transactions in 2008. The reasons behind this growth were Indian and

Chinese demand.

4.2 Indian players – hunting for coal assets

For Indian players, coal has remained major target. The main counties which remained

targets for Indian hunt were Indonesia and Australia while CIL and some other players

have also moved to Mozambique in the search of coal assets.

17

Year 2007 registered 20 deals where Indian companies were buyers. Out of these

deals, 80% deals were cross boarder deals. Some of the key players involved in these

deals were Reliance Energy which acquired assets in Indonesia, Bhushan Steel Ltd.

acquired coal properties in Australia in joint venture. Gremac Infrastructure also

acquired 11 coal mining assets in Mozambique.

Tata Power also acquired key 30% stake in coal mining and marketing subsidiaries of

PT Bumi Resources Tbk which is largest coal producer in Indonesia. Tata Steel

acquired stake in Riversdale coal asset in Mozambique.

In 2008, GMR Energy also acquired an Indonesia Coal company with about 100 million

tonnes of coal resources. The list of deals involving Indian buyers is long and expected

to grow fast but there are key issues which need to be understood and taken care of

while targeting an asset abroad.

4.3 Concerns need to be addressed while going for acquisition

4.3.1 Strategic fit of asset

An asset is acquired with an aim that it should satisfy needs of acquirer and should fit

into company’s strategy to give it competitive edge. For example, Power Finance

Corporation invited bids for development of imported coal based Ultra Mega Power

Project (UMPP). The bidder who quoted lowest won the bid. An asset which can supply

cheaper coal at power plant will benefit more. Thus winning bidders are now looking to

own assets for importing coal. Thus an asset in nearby country and with good quality of

coal will help in achieving goal. Similarly different acquirers may have different needs

and strategies. Thus identifying strategic fit of asset if first and foremost condition for

any acquisition.

4.3.2 Technical due diligence of property

Once a property is identified for acquisition, very first stage is assessment of technical

parameters of properties like reserves, quality, stripping ratio, and other geo – technical

parameters. Unless reserves and quality of coal reserves identified with certainty it is

very risky to make any investment decision. In most of the cases acquirer reviews

geological report, drilling data and other reports available on the subject. Thus

interpretation also depends on quality of data available. In some cases, acquirers may

also go for drilling and trenching for collection of additional geological data for

ascertaining quality and reserves. Existing studies may not be comprehensive or may

be lacking in precision thus it is very important to ascertain the reserves by conducting

thorough study and review of all available information. Sometimes due to wrong

interpretation, more coal reserves are reported while sometimes some reserves are left

unreported. To avoid any future surprises ascertaining technical parameters are

critical.

18

4.3.3 Financial due diligence

Technical due diligence is only an indicative of quality and quantity of reserves to

indicate go ahead for any acquisition. Once it has been decided to proceed, it is

necessary to conduct a thorough financial due diligence of the target property.

Financial due diligence is necessary to ascertain any contingent liability which may

arise as a result of transaction as well as past performance and compliance with

financial reporting standards. Financial due diligence will also help in identifying all the

assets with target entity. There are several issues involved with financial due

diligence. In several cases, all the relevant documents may not be available. Also in

some cases, if law does not require, proper records may not be available to conduct

financial due diligence. Also it is necessary to assess financial projections to assess

the level of confidence of management. Projections and predictions may give

indications about future prospects of target business. Another major issue which needs

to be addressed and taken care of is off balance sheet items. Many companies resort

to off balance sheet financing and leases. These may impose liability on acquirer in

future.

4.3.4 Legal due diligence

Once the financial and technical due diligence is over and decision has been take for

acquisition, legal due diligence become extremely important. Legal due diligence is

necessary to understand legal aspects of all the agreement and commitments made by

target company. A thorough review of articles of association is necessary to identify

any share transfer restrictions, company constitution etc. Legal due diligence is also

required to ascertain the legal claims against target and litigation in which target

company is involved.

In cross boarder acquisition, through review of legal provision, law and judgments is

required to ascertain political risk involved in the transaction. Any change in law may

leave assets unsuitable and out of strategic fit of acquirer.

4.4 Indian targets – road ahead

In last few years, Indonesia has been major target for Indian acquirers looking for coal

assets for thermal coal. For coking coal Australia has been favorite destination of

Indian companies. Though in recent years, some Indian companies have been moving

to Mozambique and other African counties to acquire coal assets but Indonesia is still

prime target of Indian companies hunting for coal assets.

In 2008 Indonesia has passed new mining law. In the light of new mining law, it needs

to be assessed if Indonesia will retain its position as favorite destination.

19

A5. Will the new Indonesian mining law allow

Indonesia to continue as India’s largest coal

supplier?11

Indonesia has vast amount of coal resources. As on 2007 total coal resources in

Indonesia stand at 93.4 billion tonnes including Sumatera - 52.5 billion tonnes and

Kalimantan - 40.4 billion tonnes although total reserves stand at 11.8 billion tonnes

from which Sumatera has 4.7 billion tonnes and Kalimantan has 7.2 billion tonnes.

Quality wise Indonesian coal varies from low to high, approximately 25% of coal

resources are low rank whereas 60% are medium and only 15% have high quality.

Assuming constant production levels of year 2008, coal reserves will last for

approximately 50 years while resources will be available for over 400 years of

production. Also there are some regions like Papua having potential but are not

explored yet. Five 1st generation CCoWs(Coal Contract of Work) and PTBA account

for approx 50% and 23% of Indonesian coal reserve and resources respectively.

Percentage wise distribution of coal in various region of Indonesia is shown in

diagram below:

Source: Indonesian coal mining association

11 Ali Mardi, Partner, PricewaterhouseCoopers, Indonesia; email: [email protected]

Distribution of Coal Resources Potential

7%

34%

37%

2%

17%

20

Indonesia offers significant opportunities to investors in coal mining sector; mainly

driven by the size of its coal resources. Indonesia is the world’s largest exporter of

thermal coal and major importing countries for Indonesian coal are Japan (17%),

Taiwan (13%), India (17%) and Korea (10%) . Currently major coal exporters are first

generation CCoW holders.

5.1 The new mining law: Its scope and how it will impact coal operations

The new mining law no. 4/2009 was passed by the parliament in December 2008 and

became effective on 12 January 2009 by replacing the old mining law no. 11/1967.The

key features of new mining law which are relevant to coal mining are:

• Establishment of mining business zones

• Licensing: IUP/ IUPK, bidding process and no foreign investment restriction –

no more CCoW (means no lex specialis status) or KP

• Domestic Market Obligation (“DMO”) plus control over production volume –

although no details are given yet

• Coal IUP: maximum 50,000 ha for exploration (7 years) and 15,000 ha for

production (20 years + 2 x 10 years)

• In-country processing requirements, but this unlikely to be relevant for coal

• Priority for local mining service providers, no affiliate involvement is allowed

• Divestment requirements plus IUP transfer restriction

• Various implementing regulations to be issued by 11 January 2010

• There is no provision over coal pricing but the Government is separately looking

at this issue

There are some transitional provisions as well which include CCoW provisions to be

adjusted within one year, except for state revenue, CCoW companies must submit

action plan in all CCoW area up to the expiration of CCoW otherwise the CCoW area

will be adjusted and there is no provisions on KP transition but if CCoW is required to

conform, KP will likely be required as well.

The new mining law has impact on existing coal operations of CCoW holders as well

as of KP holders. For CCoW holders there is nothing new in DMO, this is already

present in first to third generation CCoWs. Some transitional provisions for CCoW

holders are questioned which are whether costs related to tax and royalty rates likely

remain the same, whether a mere action plan sufficient, whether an extension through

an IUP will be accounted for and what if a CCoW company cannot reasonably exploit

all the coal reserves until the end of CCoW term especially the first generation with

21

significant reserves and resources and CCoWs expire in 2020 to 2024.The mandatory

area of relinquishment is also questioned. It is still not clear if CCoWs expire then

would they be replaced by an IUP having any tender requirements, tax provisions etc.

The impact of new mining law on operations of KP holders is also not clear and is

questioned that whether there is automatic conversion into IUP and if yes then what

would be the process for that the conversion, whether KP terms are not consistent with

the new law and whether issue of foreign ownership is now resolved. New mining law

imposes clearer requirements of DMO to follow prevailing law. Subject to the KP

conversion rules and agreement with the KP holder existing foreign “investor” with

often complicated series of contractual arrangements with local KP holders may need

to unwind the arrangement as it can now own the IUP directly.

After this new law new investment depends on the implementing regulations, including

DMO, tender requirements, divestment, etc. The absence of a CCoW scheme may

deter new investment in big projects. The new law is likely to attract smaller-size

foreign investments which were historically done through “cooperation” with local KP

holders. The dispute settlement through court procedures and domestic arbitration is

unlikely for attraction of new investment given the Indonesian legal environment.

Future of Indonesian coal market

Current energy mix Energy mix 2025

RE stands for renewable energy and includes bio-fuel, geothermal, biomass, nuclear, hydro,

solar, wind and liquefied coal.

According to the current energy mix trend, domestic coal accounts for only about 15%

of total energy consumed which is expected to increase significantly by 2025. Share of

coal in energy mix is expected to grow from present level of 15% to 33% by 2025.This

will likely result in an reduced percentage of coal being exported compared to total

51.66%

28.57%

15.34%

1.32%

3.11%

Crude Oil Natural Gas Coal

Geothermal Hydro Power

30%

33%

20%

17%

Natural Gas Coal Crude Oil RE

Indonesian coal production, which represents a significant hurdle for Indian coal

importers trying to increase their coal imports from Indonesia due to limited export

quota, competition from other Asian coal consu

Taiwan.

The Government of Indonesia is planning to convert diesel

total capacity of 7,753MW into coal

program the Government has been constructi

total capacity of 10,000MW. In addition to that 2

expected to add another total capacity of 10,000 MW of which 28% of the capacity will

be from coal-fired power plant

primarily use low-rank coal as feedstock.

The forecast for future production, domestic sales and export of Indonesian coal is

represented with the help of

Forecast: production,

The trend shows that coal production and domestic sales have been increasing over

the years while export volume will plateau at some point around 2010 and there is not

significant increase in export expected up to 2025.The increase in fut

production will be achieved through ramp

development of new coal mines. Future of Indonesian coal production and export will

also depend on resolution of issues surrounding 1

period, extension to IUP, etc.

It is expected that new DMO regulation will be issued soon implementing regulation of

law no. 4/2009 to secure domestic coal supply. New regulation on minimum coal sale

price will also be introduced to encourage fair pricing

market. The price will follow various coal price indices, including the Indonesian Coal

Index.



quota, competition from other Asian coal consumer countries like Japan, Korea and

The Government of Indonesia is planning to convert diesel-fired power plant

total capacity of 7,753MW into coal-fired power plants. As per 1

program the Government has been constructing new coal-fired power plants with a

total capacity of 10,000MW. In addition to that 2nd crash program in Q2 2009 was


fired power plants. It was expected that these new power plant

rank coal as feedstock.


represented with the help of graph below.

production, domestic sales and export (in million



significant increase in export expected up to 2025.The increase in fut

production will be achieved through ramp-up of current mine production and


also depend on resolution of issues surrounding 1st generation CCoWs, e

eriod, extension to IUP, etc.


o. 4/2009 to secure domestic coal supply. New regulation on minimum coal sale

price will also be introduced to encourage fair pricing between domestic and export


22



mer countries like Japan, Korea and

fired power plants with a

fired power plants. As per 1st electricity crash

fired power plants with a

crash program in Q2 2009 was


at these new power plants will


llion tonnes)



significant increase in export expected up to 2025.The increase in future coal

up of current mine production and


generation CCoWs, e.g., transition


o. 4/2009 to secure domestic coal supply. New regulation on minimum coal sale

between domestic and export


23

The Government is planning to provide incentives to CCoW companies through lower

coal “royalty” for development and sale of low-rank coal and may also re-instate the

coal production sharing scheme for CCoW holder, where the Government will receive

coal “royalty” in-kind. In nutshell the Government will prioritise Indonesian coal

production for domestic market, through issue of various regulations in the future,

including DMO and coal pricing guidelines.

Now only time will tell whether the new mining law will be able to attract larger

investment projects, which in turn will increase Indonesian coal production/export.

24

A6. Logistics – major contributor to development of

coal sector

While the demand centers are distributed across the country, supply of coal is

concentrated in pockets. Most of the Indian coal resources have been concentrated in

the eastern and southern zone in the stats of Jharkhand, West Bengal, Chhattisgarh,

Orissa and Andhra Pradesh.

As coal remains major source of energy in India, demand for coal has been derived by

industrial energy demand. In India, western zone and southern zone remains major

demand drivers for coal while north has also contributed significantly in the demand of

coal by various industries. As discussed above, major coal consumers remained power

industry for thermal grade coal and steel industry for coking coal.

If consumption pattern of domestic coal is analyzed by consumer location and coal

sources, it can easily be interpreted that major consumers of domestic coal are having

consumer units set up at far distance from coal source. Thus bringing coal to the

consumption location has been critical issue to Indian coal industry. Further adding to

these woes is concentration of coal resources in few small regions. Thus evacuation of

coal from these coal bearing reasons is another major challenge. This emphasizes

need of having logistics structure which satisfies transportation needs of India industry.

The major mode of coal transportation within India has remained railways while small

quantity has been transported by road transport. Other modes used in India for coal

transportation are MGR, Belt conveyor, ropeways etc. The chart below shows

contribution of various modes in coal transportation.

Coal transportation by various modes

49%

26%

19%

4% 2%

Rail Road MGR Belt Rope

25

It can be seen that about half of total coal transported in India is being transported

through rail route. Further, in next 5 to 10 years time, coal production is going to double

from current level of about 550 million tonnes which will require additional

transportation capacity. Thus railway infrastructure needs to be developed to meet

growing demand.

From past performance of India coal industry, it can be observed that domestic

production has not been able to meet demand of coal by India and this gap between

demand and supply has been continuously rising. In 2008, India imported about 50

million tonnes of coal to meet its demand. About 50% of coal imports were thermal coal

while balance being coking coal. The major demand driver for imported thermal coal

was power sector due to lower production of thermal coal compared to its demand.

Steel industry remained importer for coking coal.

Even in future, India is expected to import coal to meet its growing demand. Even if

India augments its production capacity, import of coking coal seems to be inevitable

even in long term as India has small reserves of coking coal and also production is not

sufficient to meet demand from steel sector. Adding to this worry is poor quality of

coking coal which requires it to be blended with imported high quality coking coal to

make it usable to steel industry. Thus all such factors lead India consumers to rely on

import of coal for which efficient and modernized port infrastructure is much needed.

6.1 Present status of coal transportation facilities in India - Railways

As discussed above, about half of total coal transported in India is being transported

through rail route. Further, in next 5 to 10 years, coal production is going to double

from current level of about 550 million tonnes which will require additional

transportation capacity. It has already been mentioned that our coal reserves are

concentrated in small region in only 9 states while consumers are in all the states

across India. Thus off take of coal from source need high traffic handling capacity.

At present, states like Orissa, Jharkhand, West Bengal and Madhya Pradesh which are

major coal producers need to supply coal to distant states of Punjab, Haryana, Delhi,

Maharashtra, Rajasthan, Southern India thus heavy congestion in rail network has

been observed many times in the coal producing states which lead to delays in

transportation. Majority of coal transported from Jharkhand, West Bengal and Orissa

needs to be evacuated from the railway network which do shared heavy load of

passenger traffic as well. Main transportation routes being Delhi-Howrah and Howrah-

Chennai which are also major routes for coal transportation results in congestion and

frequent delays. Delays result in penalties and demurrage which further adds to cost

and result in production loss of consumer units as well. Also further proposed capacity

addition is adding to worries. Orissa is one state where maximum capacity addition for

coal production is proposed. New mines of large capacity upto 50 Million Tonnes per

Annum (MTPA) are proposed to be developed in the region majority of which will be in

Angul region itself and it will require additional coal handling and transportation

capacity of about 300 million tonnes within next 5-7 years.

26

To achieve this level of coal production, railway will need to augment capacity in short

term for handling of machineries, equipments and other developmental facilities as

well. Before discussing the steps need to be taken for future and proposed plans, first

we need to discuss the issues and challenges faced by coal industry and railways in

development of coal industry.

6.2 Challenges in coal transportation and capacity addition

6.2.1 High transportation cost

In India, subsidizing of passenger fares at cost of cargo freight has been a matter of

talks for long. When different cost components of landed cost of coal are compared, for

plants located at far distance from coal sources, the contribution due to high

transportation cost makes the coal cost almost double. High transportation cost result

in high cost of products of end use industry.

6.2.2 Delays in development of proposed railways capacity addition projects

Though many projects have already been proposed by railways for development of

new lines, doubling and tripling of existing lines, electrification etc. but projects have

been delayed due to several reasons. Delays in development of Indian Railways’

infrastructure thus discourage miners from developing their own infrastructure and

development of mines as well. Thus timely execution of infrastructure projects has to

be done.

6.2.3 Mismatch in capacity development

Development of scheme for new railway lines has been concentrating on track

development. Low focus has been on matching capacity of railway lines with rolling

stock capacity. Also plans for rolling stock have been done in totality. While developing

plan for capacity addition, major concentration has been on developing overall capacity

rather than adopting micro level approach and analysis of industry wise demand for

rolling capacity.

6.2.4 Technological and operation challenges

Lack of technology upgradation and poor coordination among different levels of

administration and users of railway facilities have also been issues. In heavy loading

zones, yard capacity needs to be increased. Also unloading equipments need to be

upgraded to enable faster loading and unloading of coal.

6.2.5 Challenges in development of rail network

Formation of coal resources is in the form of contiguous seams. Coal blocks exist in

continuation in spread in very small area. If it is desired to exploit these coal resources

27

scientifically and efficiently than construction of any infrastructure over the land

overlying these coal reserves may not be possible. Especially if we discuss about

Orissa, many coal blocks have been allotted to public and private sector companies

which are planning to start production in short span of time. Since majority of these

blocks are adjacent to each other, laying a rail network may not be possible upto these

blocks because of unavailability of non coal bearing area. This is a major issue in

developing rail network in densely coal bearing areas. Even if coal miners plan to

develop private railway sidings till rail network of Indian railways, land availability will be

a challenge.

6.3 Future programme of Indian Railways

Indian Railways have been key to development of coal and coal related industries.

Indian Railways have been coordinating its efforts with Indian industries which are

major consumers of its freight services. For long, Indian industries have been

complaining of prioritized movement of passenger trains over freight carriers. Also

sharing of same tracks for cargo transport and passenger movement has been a

matter of discussion for service consumers. Indian Railways took a step to address

these issues. It has already been proposed to develop dedicated freight corridor (DFC).

The two routes on which project of DFC are going on are Howrah – Delhi and Delhi –

Mumbai. Proposed Howrah-Delhi corridor will be a great relief to coal sector as this

route is a major coal transport route. Further proposed tripling of railway line between

Bhubaneswar and Vishakhapatnam will boost coal transportation. Other projects which

are going to be great boost to Indian coal sector are double and triple lines between

Rajatgarh-Khurda and proposed rail link between Talcher and Paradip which will help

evacuation of coal mines from MCL command area.

In addition to this, Indian Railways have proposed to connect New Mangalore, Kandla,

Tuticonrin and Diamond Harbore to main line and nearby major cities which will further

boost transportation via rail-sea-rail mode as well as import of coal which may prove

cheaper as well.

6.4 Coal import and role of ports in India

As discussed above, India has imported about 50 MTPA of coal last year. This import

is expected to increase more in future. The import has been from various sources like

Australia, Indonesia and South Africa.

India has 12 major ports and about 180 minor ports. Twelve major ports in India

handled a total of 519.24 million tonnes of cargo in 2007–08, an increase of 11.94 per

cent over 463.78 million tonnes handled in 2006–07. The figure below shows the

distribution of commodities handled at India Ports.

Major ports in India handle more than 70% of the cargo volume and the share of cargo

handled by minor ports are continuously increasing over last twenty years.

Commodities handled at

Source: IPA publications

Most of the coal handled at India

future, major ports are expected to handl

This will require future capacity addition. But before going to future requirements of

port development, we should discuss vari

ports.

6.5 Issues for coal handling at ports

6.5.1 Low level of mechanization

Indian ports are not having advanced and modern technology for coal and bulk cargo

handling. Low unloading capacity and lack of dedicated

system for coal have been posing a challenge. Though amount of coal handled has

not been very high in India for individual ports but looking at future coal import,

dedicated facilities need to be developed at some key ports in India.

6.5.2 Inadequate port capacity

The cargo handling capacity of major

2008; the growth in cargo volumes at ports has been phenomen

years. The ports are projected to handle more and more traffic in

anticipated GDP growth of 8%. Therefore enhancement of port capacity is imperative

to meet the adequate traffic and decrease in traffic congestion thereby leading to

increased TRT and dwell time. Similar trend will continue for coal handling a

32%

18%

5%

8%1%

2%

18%

16%

Commodities handled at ports in 2007-08

ublications

Most of the coal handled at Indian ports is being handled by major ports only. Even in

future, major ports are expected to handle major proportion of total coal handled.


port development, we should discuss various issues related to coal handling at India

Issues for coal handling at ports

echanization


ow unloading capacity and lack of dedicated berthing and handling

been posing a challenge. Though amount of coal handled has



Inadequate port capacity

The cargo handling capacity of major Indian ports has been 529

2008; the growth in cargo volumes at ports has been phenomenal

The ports are projected to handle more and more traffic in



increased TRT and dwell time. Similar trend will continue for coal handling a

32%

POI

Containers

Coking Coal

Thermal Coal

Fert. Raw

Fin Raw

Iron Ore

Others

Share of cargo handled by ports

7%11%

93%89%

1985-86 1995-96

Minor Major

28

ajor ports only. Even in

major proportion of total coal handled.


ous issues related to coal handling at Indian


berthing and handling

been posing a challenge. Though amount of coal handled has



has been 529 million tonnes in

al over the past few

The ports are projected to handle more and more traffic in the view of



increased TRT and dwell time. Similar trend will continue for coal handling as well.

Share of cargo handled by ports

28%

72%

2007-08

Major

29

6.5.3 Inadequate navigational aids and facilities

Most of the ports are not equipped by vessel traffic management system (VTMS),

VTMS facilities are used for regular berthing of ships. Most of the Indian ports have

sufficient number of marine crafts like tugs and launches which may not be sufficient

to meet the increased vessel traffic in the coming years.

6.5.4 Bunching of vessels

The number of berths available for handling specialized cargoes/containers are

limited e.g., mechanized ore handling plants for iron ore and coal etc. Recently,

Paradip port is developing a dedicated berth for coal handling.

6.5.5 Low cargo handling capacity

Cargo handling capacity of ports is generally low; the productivity at berth is very low

at many ports on account of a combination of few factors.

6.5.6 Inadequate cargo handling equipments

The cargo handling equipments/machinery at the ports were commissioned years

ago and has outlived their designed life span. The productivity of these equipments

does not conform to the requirements of the modern vessels.

6.5.7 High down time of equipments

The equipments that’s available at the ports breakdown frequently due to poor

maintenance instead of preventive maintenance. The large response time, non-

availability of spares and dependence on proprietary parts result in large down time

of equipments.

6.5.8 Insufficient IT implementation

The resources at the disposal of the port are distributed and under utilised in the

absence of an ERP system. These are the factors which need to be addressed to

develop and promote coal handling.

30

6.6 Roadmap for coal logistics

As discussed earlier also, Indian Railways have proposed many projects for

development of cargo handling in India, some of which will help in developing coal

sector. The projects like connectivity of Paradip port and Kandla port will help in

developing port sector and coal handling facilities at these ports. Thus Indian

Railways, Port Authority of India and coal industry needs to work in close

collaboration to plan development of infrastructural facilities as per industry

requirements.

31

A7. Minerals or forests? or both?12

The debate in Indian mining industry has shifted towards whether the country needs

forests more than minerals. Like everything else in the world, there cannot be a straight

answer to this question. However, a win-win situation can arise from pragmatically

looking at our forest and mineral resources on one hand and weaving sustainability in

the mining projects on the other.

It has been mooted by the Ministry for Environment and Forest that mining would not

be allowed in reserved forest areas and could be permitted in the de-graded forests. As

of now, there does not exist any such classification of forest and hence, the proposal

lacks clarity. However, this has a potential to result in a win-win situation for mining and

forestry. From the mining perspective, this essentially means that several of the

projects in the de-graded forest will see the light of the day soon (assuming that the

clearance and approval requirements for such forests will be rationalized). On the

other hand, the reserved forests that need preservation will then be completely out of

bounds for mining. This may result in a slight downward revision of the national mineral

inventory. This however, should not be a concern since such mineral resources would

not have been exploited even otherwise (considering labyrinthine process for

clearances, stiff resistance from the environmental groups, and social risks) and hence,

better stand not accounted for as mineral resource.

On the second account, sustainability needs to be built in the industry processes and

performance evaluation criteria. The industry does a lot of work in corporate social

responsibility but a lot needs to done further to quell the public perception of falling

short on expectations. Work needs to done on two accounts. First, the industry needs

to assimilate sustainability – from environmental and social angles – into all processes,

from mining, beneficiation to mine waste management. The efforts need to extended

from meeting compliance requirements to genuinely mitigating these risks through

capital investments and operating expenses. The second account is with regard to

communicating about these sustainability efforts to all stakeholders. Some of the larger

miners in India have done well and made significant impacts on the environment and

communities in the vicinities of the mines they operate. However, they fail to

communicate effectively to their stakeholders and hence, continue to face public

antipathy, which sometimes may affect business continuity. Globally accepted

frameworks for sustainability reporting could be effective tools to manage sustainability

efforts and to communicate with the stakeholders.

It can only be hoped that country does not have to pick one of the two – forests or

minerals – but can have both ingredients for sustainable economic growth.

12 Dipesh Dipu, Principal Consultant, PricewaterhouseCoopers Pvt. Ltd., India; email: [email protected]

32

A8. Major challenges before coal industry

8.1 Equipment supply constraints

Delivery lead time delays for plant and mobile equipment have a significant impact on

production volumes and operating costs. The following graphic provides the lead times

for key equipment faced by global mining players. Key strategies applied by global

players to overcome these difficulties are measures to improve the life of the

equipment, measures to improve the relationships with equipment suppliers and

others.

Other key concerns are related to supply of power and water for the regular operations

of mine. The mine developers are detested by the locals for heavy usage of water and

are accused of low water reserve levels. Global players have started to develop their

own captive generation for reliable and uninterrupted power supply.

Few companies have started backward integration and acquired suppliers to overcome

the above difficulties. Sandvik, an equipment manufacturer has acquired Wolfram

Bergbau-und Huetten-GmbH Nfg KG, a tungsten producer.

8.2 Recruiting and retaining talent

The availability of professionals and skilled labor is an extremely pressing issue. Mining

industry is perceived to be less attractive for many students when compared to other

available options. The following graphic provides key insights into the reasons for such

aversion. These results are derived from a survey conducted by us in April 2008. Most

of the reasons attributed can be addressed by improving the working conditions

leading to higher percentage joining the industry.

33

Source: PwC Survey, 2008

Apart from attracting new talent, there are lifestyle issues for retaining the existing key

resources available with the companies. Mining companies may need to identify

innovative strategies to attract and retain the talent.

8.3 Improving efficiency

With the recent changes in prices, many mining companies have focused on reducing

capital and operating expenditure and managing production levels to ensure they

operate at lowest possible cost. Introduction of coal regulator might lead to tighter

scrutiny in pricing mechanism. This might put significant pressure on CIL to reduce

their costs.

It has become increasingly important for the companies to undertake cost reduction

initiatives, which include improving the efficiency levels by adopting newer

technologies. Many companies had to resort to drastic steps of reducing their

headcount and scale back or closing their operations. Key parameters that are used for

monitoring the efficiency are OMS (output for man shift), cost of production per ton,

system throughput.

8.4 Geotechnical issues and selection of technology

With the growing demand for coal, CIL will have to innovate or implement new

technologies for winning coal at greater depths and difficult geo-mining conditions.

Significant coal resources in India lie at a depth below 300 meters. Existing coal

production levels would be difficult to sustain with open cast technology due to

increasing break even stripping ratios. Therefore it becomes important for CIL to tap

the deep seated coal resources with improved mining technologies. Longwall mining

technology which was not successful in India due to reasons like difficult geomining

conditions, unavailability of spares, technology transfer issues should be studied in

greater details for its successful implementation in Indian coal seams.

12%

23%

21%18%

14%

12%

Lack of entertainment Lack of Social Life

Remote Location Unattractive Working Conditions

Role and Responsibility Salary

34

Thick seam mining is one of the key areas of concern in India. Existing recovery using

conventional thick seam mining technology including manual longwall technology with

multiple lifts and sand stowing is around 20-30% . Other methods of winning coal like

hydraulic mining and highwall coal mining should also be studied in detail for their

introduction in Indian mining conditions.

Surveying technologies also need improvement to avoid faults in plans and sections.

Wrong plans in past has lead to many accidents. Safer ways of coal evacuation

through new technologies should also be studied to improve system throughput and

output per man-shift.

8.5 Infrastructure bottlenecks

Infrastructure is one of the key cost components on the coal value chain. There is a

lack of proper rail, road and port infrastructure that is required to make customers find it

cost effective and convenient to procure coal domestically. As a result of the high

logistics and transportation costs in sourcing domestic coal, many coal-consuming

industries are resorting to coal imports from other cost efficient countries.

There are shortages in the capacity of washeries available in India. Need of coal

washery is also pressed upon due to regulatory restrictions viz coal with ash content

more than 34% cannot be carried for distances more than 1000 kms.

8.6 Productivity issues

Owing to the usage of inefficient technologies, manpower productivity in Indian coal

mines is low as compared to that of US and Australian mines. For example, long wall

mining which is considered to be an efficient method of production, has not been

popularly adopted in India due to absence of appropriate equipment, inadequate

infrastructure and lack of proper training facilities to develop the skills required for long

wall mining, (even though the geotechnical parameters may be suitable in certain

circumstances).

8.7 Risk mitigation

Mining industry is faced with many risks like the operational risk which threatens the

consistency and efficiency of its production. Given the risks involved in the operations it

becomes inevitable to put a risk management program in place to improve the ability to

prevent, detect and correct critical risk issues. Standardization of the risk management

principles and adoption of internal controls for cost and project management may help

in integrating the efforts to overcome the operational risks across the organization

Presently there are other risks as well which the industry is facing such as credit

crunch in the markets and poor economic forecast for the short to medium term. All

these factors make it harder for miners to start new projects, refinance their debt and

35

complete existing projects. Resulting in reduced production, this situation may

adversely impact the industry’s growth.

8.8 Inconsistent quality of delivered coal

In India inconsistent quality of delivered coal is a key concern for the user-industries.

Of the total coal produced only 20% is washed and sold, the rest is sold on an ‘as

mined basis’, specifically the coal that is transported beyond 400 kms. Many states,

including Andhra Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Punjab and

Rajasthan, have brought this issue to the notice of the Ministry of Power, and

mentioned inconsistent quality of coal as the main reason for high coal consumption.

8.9 Regulatory compliance

The uncertainty and inconsistencies in the administration, interpretation and

enforcement of the rules and regulations are adding to the challenges of the coal

mining industry. This is hampering further investment in the sector which is witnessing

unprecedented growth in demand. Apart from financial compliances, mining companies

must comply with a number of other regulations applicable to the sector. These include

rules pertaining to tax rates, mining rights and land title; regulations related to

environmental compliance and corporate social responsibility; laws governing

occupational health and safety. In order to ensure compliance, mining companies must

also seek out industry-specific guidance to avoid violating the rules.

8.10 Environmental concerns

Growing environmental emissions are also a cause of concern for the global coal

industry. The industry is one of the biggest contributors to greenhouse gas emissions

with the release of methane gas as a by-product. Coal production generates fly ash,

which lead to air pollution, and even after being consumed by the cement and brick

industries, a significant portion remains as left over, leading to environmental and

health concerns. With rising public scrutiny for environment and social protection it is

likely to put a regulatory and societal burden on the industry.

The industry is addressing the issues by improving coal efficiency and by following

carbon storage and capture techniques. Coal companies world over are also adopting

ways to increase the thermal efficiency of coal in order to reduce carbon emissions per

unit of electricity generated. Coal washing and beneficiation has emerged as an

effective technique for improving coal efficiency. Another technology, gasification of

coal in integrated gas combined cycle (IGCC) systems, has also gained popularity and

has become commercially viable.

36

8.11 Resettlement and rehabilitation issues

Mines are mostly located in remote geographical areas which might fall under the

forest cover or tribal areas. Mine development mostly might lead to displacement of

existing habitants. Rehabilitation of households displaced due to mine development is

not only a sensitive issue but also a big challenge for many mining companies today.

This not only leads to longer delays in mine development but also puts an additional

cost burden on the mining companies. During the XI and XII plans, CIL plans to

develop 125 new mines for which it will have to acquire 67,000 acres by FY12. CIL

plans to invest INR40–50 billion in resettlement activities.

8.12 Sustainability issues

Sustainability development which is defined as “development that meets the needs of

the present without compromising the ability of future generations to meet their own

needs,” is being followed by most of the global mining companies. Sustainability

development is considered even more important for mining companies as they are

considered responsible for depleting the natural resources through mining.

Sustainability development should try to balance the social, environmental and

economic aspects of the business. It involves significant costs in terms of capital and

management time, but the benefits accrue to all the stakeholders.

Apart from the external requirement through regulatory mechanism, there are

significant benefits accrued through sustainable development they are, better return for

shareholders, improved management of risk, reduction in operating costs, more

business opportunities, attracting and retaining talented employees, maintaining or

improving the value and quality of products with less impact on the environment, better

development and employment opportunities for and relations with local communities,

local and regional economic development that over time reduces operating costs.

37

A9. Risks in coal mining

When a business preposition is considered, it is imperative to analyse the operating

environment with utmost caution. There is always some risk element inherent in every

business, especially in commodity such as coal, the risk looms even higher. The

concerns like energy security, availability of resources, political instability, could make

the government authorities to alter the policies and regulations which increases the

overall risks.

It is crucial to ascertain the broader factors like political environment, financial risks,

and geo-mining risk that persist in relation to coal mining. The applicability of such risks

has to be analysed using a proper risk framework. Risk is a combination of constraint

and uncertainty which always exists. The risk can be minimized either by eliminating

the constraints or by finding and reducing uncertainty. The general principle of risk

assessment involves following activities - risk Identification; risk assessment and risk

mitigation mechanism (risk management)

Risks related to coal mining can broadly be categorised broadly into following heads:

(a) Political & legal risks

(b) Financial risks

(c) Operational risks

These heads can further be divided to understand specific risk item that may affect the

coal mining business.

9.1 Political & legal risks

The political environment in any country poses one of the most ascertainable risks for

the businesses. It is observed that industries like coal mining get affected due to

change in government policies. The business operations may become infeasible if the

policies related to development of coal mining industry are not defined properly. The

political & legal risk further be divided into following sub-heads -

(a) Country environment risks

(b) Investment restrictions

(c) Taxation concerns

(d) Risk of restriction on resource transfer

38

9.1.1 Country environment risk

Transparency of licensing procedures: The non transparent licensing policies may

lead to a higher turnaround time for different approvals of licenses for mine operations.

Further this might lead to a higher incorporation or preliminary expenses.

The deregulation in the Indian economy has somewhat proved to be not unsuccessful

in removing barriers, creating more transparent trade and investment regimes, and has

alleviated but not eliminated, red tape. The areas of improvement include taking steps

toward a more transparent coal block allocation policy, grant of reconnaissance permit,

exploration licence and mining lease. Also, the companies mining should be

responsible for timely payments of correctly assessed statutory levies.

Expropriation by government: It is characterized by confiscation of the private

assets, and a pittance payment. This payment is sometimes a formality, and may not

represent an acceptable reparation, because the transaction is not one to which the

owners, as forced sellers, have freely consented. Moreover, adding to the complaints

of the owners, the competition of any other buyers is excluded. This could render the

entire business of the company as loss and can be a threat in long term.

Considering the present policies of government of India, the risk of appropriation is not

a matter of serious concern, as the appropriation by government is not allowed until the

matter is of national interest. Coal Mines Nationalization Act, 1973 provided the

government with power to nationalize the coal assets in the interest of nation and to

promote health and safety in coal mines. Most of the coal resources are being owned

by government owned companies. Moreover to promote the private participation in

development of coal mines in India and to bridge the widening gap between demand

and supply of coal government is promoting captive consumption of coal by defining

end uses of coal. The risks due to expropriation are almost negligible.

Terrorism: Terrorism may affect the investments in any country. The risks due to

terrorism on coal mining in India is non existent till now but local naxalism in coal

mining areas may affect the timely development of coal resources and which may in

turn affect the energy needs of the country.

9.1.2 Investment restrictions

Sectoral restrictions: There could be a possibility that the government of country may

impose any restriction, in future, on the expansion of company in other sectors. Such a

restriction could curtail the future expansion prospects.

In India, presently there is no sectoral restriction for mining companies. Investments

are allowed in coal exploration, coal mining, beneficiation and allowed end uses by

private players.

Requirements for disclosure of technology: The requirements as to disclosure of

technology do not pose a significant risk. The disclosure related to mining technology

has to be made to Directorate General of Mines Safety for its approval.

39

9.1.3 Taxation concerns

Tax structure: There are no significant risks due to corporate taxes and statutory

levies collected for mining activities.

Restriction on transfer pricing: The foreign entities investing in coal mining will have

to enter into Advanced Pricing Agreement (APA) from 2011 for fixing up prices at arms

length distance and agreement on pricing methodology for international transaction.

Withholding taxes and unitary taxation policy: Withholding taxes are applicable for

payments made to NRIs and foreign companies and are determined by the Finance

Act passed by the parliament. Theses taxes are in respect to those countries with

which India does not have a Double Taxation Avoidance Agreement (DTAA).

9.1.4 Risks of restriction on resource transfer

These are the risks of any change in government policies barring the transfer of

resources by the company, which can be in any of the following forms:

Tariffs, NTBs inhibit sourcing, selling: The restrictions imposed by government on

transfer of mine produce, in form of tariffs or non tariff barriers such as quantity quotas

may affect any business in long run. These restrictions can be in form of sourcing

capital equipments, or increasing the tariffs (levis, octroi, duty etc.), which may lead to

higher investments and have a negative on the project financials.

The present mining policies of Indian government there are no such trade barriers,

however, a prior approval may have to be obtained from Directorate General of Mines

Safety for employing new mining equipments and/or technologies in Indian mines.

There is also restriction on commercial sales of coal in open market by private parties.

As coal is in Open General Licence list there is no restriction on its imports.

Labour Issues: India has a fairly experienced talent pool for coal mining industry but

more recently the numbers of person joining the industry has reduced. The companies

investing in coal mining may face difficulty in selecting right persons. The employers

should also focus on training programs aimed at creating workforce for future industry

needs.

Foreign exchange controls, limits on repatriation: The risk due to government

controls on the repatriation of profits from the SPV or subsidiary in one country to

parent company in other country. The government can also limit the foreign exchange

controls, in wake of depreciating local currency. Any such restrictions can have a

negative affect on the returns on Investment.

40

The present policies of Indian government are supportive for mining industry. All

foreign investments are freely repatriable. Dividends declared on foreign investments

can be remitted freely through an authorized dealer. Non-residents can sell shares

on stock exchange without prior approval of RBI and repatriate through a bank the

sale proceeds if they hold the shares on repatriation basis and if they have necessary

NOC/ tax clearance certificate issued by income tax authorities. For sale of shares

through private arrangements, regional offices of RBI grant permission for recognized

units of foreign equity in Indian company in terms of guidelines indicated in

regulations. Profits, dividends, etc. (which are remittances classified as current

account transactions) can be freely repatriated.

Capital controls: Any imposition of capital controls by the government could lead to

tying up of investments, turning in to huge opportunity losses. India embarked on

easing capital controls from early 1990s. Emphasis was put on the liberalization

towards equity flows, both FDI and portfolio flows. In recent years, a large number of

foreign companies have owned Indian equities. There may be capital controls policy

in future to shift the focus of monetary policy away from the exchange rate to

domestic inflation.

9.2 Financial risks

The financial risk can be further divided in to following sub heads:

(a) Price risk

(b) Liquidity & credit risks

These risks and their applicability has been explained in the further sections

9.2.1 Price risk

Interest rate risks: The inclusion of debt in the capital structure of the company

poses risk in the form of rising and fluctuating interest rates. The bottom-line & cash

flows can be severely impacted by the changes in interest rates. The risk is higher if

the debt portion is high.

In general the debt component of mining industry is more or less equal to the equity

component or even less and hence interest payments are less. Further the risk can

be mitigated through balancing the debt portfolio on a continuous basis. The

company can raise money from different sources, and could further manage through

financial derivative instruments like interest rate swaps. This would be needed if the

company’s exposure to debt is extremely high. To understand the impacts of

changing debt-equity structure sensitivity analysis may be exercised by a company.

41

Foreign exchange risk: This risk may be substantial when a company import goods

and services for mining activities. The cost and investment to be incurred by the

company in terms of dollars, and as the repatriation of profits is also involved, any

significant change in the rupee-dollar exchange rates could affect the firm’s profit and

investment outlays.

The applicability of foreign exchange risk is high for a foreign companies bringing in

FDI; however the risk may be contained by actively seeking hedging through foreign

exchange derivatives like currency derivatives and swaps.

Commodity pricing risk: In India the coal prices are being determined by

government and the government owned companies. There is uncertainty about the

pricing mechanism of the coal from the coal companies which have been awarded

coal blocks under government dispensation route for commercial. Captively

consumed coal prices would mostly be unaffected by the fluctuations in prices of coal

sold commercially.

The commodity price risk can, however, be mitigated by pursuing long term

contractual sales and purchase agreements with most of its customers and suppliers.

9.2.2 Liquidity & credit risk

Cash flow risks: Companies may face the risk of assessing the cash flows and their

timings wrongly. The significant changes in cash flows on account of changes in

project economics could lead to losses to the company. Moreover the cash flows of

the company can also be affected due to some unwarranted events, which might

lead to a situation of cash crunch.

The project cash flows are required to be projected with utmost care and planning

capital expenses and debt repayments in the light of capital market events may help

mitigate the risks. The company should also analyse the sources where it can resort

in case of any short term or long term liquidity crunch.

Default risk: Companies may also face risks if it focuses on a narrow customer

base, which might result in inability to consummate transactions at reasonable prices

within a reasonable time frame.

Companies may need to be cautious while choosing its strategy to its exposure to the

number of customers. It needs to establish credit worthiness of its customers and

their economic & financial position.

9.3 Operational risks

The operating risks are the risk pertaining to the operations of mining business, these

can be further divided into following sub-heads:

42

(a) Geo-mining risks

(b) Contract risks

(c) Market risks

9.3.1 Geo-mining risk

Geological reserves estimation & mining risks: The geotechnical information

obtained from regional exploration may not be accurate and hence there could be

risks of erroneous reserve estimation. The geological conditions may also vary over

short distances and it could impact the recovery percentage.

The risk of difference in the expected and actual coal reserves can be mitigated

through a detailed exploration programme prior to mining activities.

9.3.2 Contract risk

Contract risks: There may be risks of project delays or cost overruns if there is

slippage in mining project implementation by the contractor.

The contract risk may be contained through proper contract terms including

performance guarantees. In India contractors are generally hesitant to take R&R and

forest clearances for coal blocks. For timely development of coal blocks, owners of

coal block should carefully evaluate the options of self engagement on R&R

activities, only administrative support to contractor on R&R issues or a separate R&R

contract.

9.3.3 Market risks

Portfolio risk: Companies may face the portfolio risk, in form of change in the

proportion of coal sold through tolling arrangements, long term fuel supply and short

term spot trading. The diversification requirements as envisaged in planning, may not

match in the actual scenario.

Portfolio allocation may be done on the conservative estimates and allowing flexibility

in the margins. It may sooth the adverse effects of portfolio imbalance. Moreover the

effect of changes in the portfolio on profit margins should also be analyzed in

different scenarios.

Volume risks: The volumes envisaged through sales from trading activities may not

materialize due to spreads being matched by other traders/vendors in the market.

Also, there may be fluctuations in the spot trading volumes.

The portfolio of sales should be constructed with lower exposure to spot trading,

which would provide the required the immunization to risk of volume. The long term

contracts will help the company in mitigating the price fluctuations as well.

43

Logistics risks: The transportation costs form a fairly substantial part of landed cost

of coal. This may make the landed costs of coal uneconomical for end usages.

Companies should optimize transportation of coal and transportation/transmission of

end use products. The location for end use plant shall be carefully chosen.

Infrastructure risks: The availability of adequate infrastructure is the foremost

cause of concern for Indian economy at present. In order to support the free flow of

trade the development has to be accelerated. The volume of coal required to be

handled at Indian ports may give rise to risks of congestions, delay in coal supplies,

and hence, may have financial implication

Companies can actively involve and satisfy themselves with the availability of

infrastructure. They should also work in direction of creation of import and railway

facilities for long run.

Competitor risk: The booming coal mining business has caught attention of various

mining companies through out the world. Hence the rise in competition is a natural

outcome. In such a scenario future prospects and the present business companies

might get affected.

The risk of competition is always there to remain, however the earlier the company

moves toward coal mining industry better are the opportunities for it.

Technological innovation risk: The technology has been changing rapidly; there is

always a possibility of a technological breakthrough which might reduce the usage of

coal for electricity production which is the primary consumer of coal in India. In such

a scenario the entire business of the company may render as unviable.

It is very difficult to have such a technology development that might replace the coal

as a fuel for power generation, at least in the next few decades. The other fuels

already pose a threat to coal, but any technology innovation may take several years

to supersede the present one, hence the dependence on coal will not come to an end

so easily.

44

A10. Importance of branding for coal mining

companies

Branding strategy is important for mining companies, to satisfy the requirements of

various stakeholders.

Branding strategy will help in addressing key concerns of the above stakeholders. The

competition in both global and domestic business environment is increasing and

achieving a unique position and competitive advantage is becoming increasingly

important. Therefore, creating and implementing corporate branding strategies are

inevitable for companies to be profitable, successful, to be considered as

environmentally sensitive. A strong brand helps an organization to efficiently cope up

with its competition and brings value proposition to life.

A powerful brand can lift organization’s status from an unknown entity to the position of

supremacy. Branding is a promise to stakeholders, the most valuable component of

overall corporate strategy which drives the organization’s direction. Branding in a nut

shell is about creating unique identities and positions for company and services

provided thus distinguishing the offerings from those of competitors. Successful

branding also creates “brand equity” which is the amount of money that customers are

willing to pay for their perceived value attached to the brand. In addition to generating

revenues, brand equity also makes the organization more valuable over the long term.

In view of the complexity in planning and management of the branding programs there

is a need for the development of a comprehensive framework that provides a holistic

view of the various facets of branding. The framework should identify and integrate the

key branding aspects, activities, as well as the tangible aspects of the brand and

should be designed to support the definition, development and management of the

integrated branding programs.

10.1 Importance of corporate branding strategy

Developing a brand strategy is a vital step in creating the organisation identity. A strong

corporate branding strategy can enable the corporation and its management team to:

• Implement the long-term vision,

• Create unique position for the organization and its brands in the market place,

• Leverage on the leadership potential within the organization.

• Harness its tangible and intangible assets leading to branding excellence

The brand strategy is critical because it forms the foundation for all other branding

activities. It establishes a focused understanding and direction which is agreed upon at

all levels of the organization. It helps anticipate and prevent the “chaos” that may arise

from conflicting understanding about organizational goals and objectives. An effective

branding strategy provides vital inputs for aligning the management and creative

processes.

45

The brand strategy outlines the overall branding architecture for the organization based

on a detailed assessment of the organization (its history, vision and mission), its

offerings (products and services), stakeholder segments (their demographics and

psychographics) and competitive marketplace. Through a distinctive promise branding

projects a differentiated position of the organization in the marketplace.

Brand strategy elements direct the brand identity to provide distinctive and explicit

expressions for the organization in terms of name and logo that are used repeatedly for

instant recognition in a competitive marketplace. The expressions gradually become

the identity for the organization’s values and what it stands for.

Thorough understanding of the following four components form the backbone of the

development of a unique branding strategy:

• Target audience (Stakeholders)

• Competitors

• Product/service mix

• Unique Selling Proposition (USP)

An effective branding strategy helps combat competition by way of creating a unique

differentiated identity of the organization for a long term sustainable existence. That is

the reason why a brand strategy is considered as the heart of the overall competitive

strategy of the organization.

10.2 Framework for the development of corporate branding strategy

The successful organizations combine a proactive and confident brand idea with an

organised and robust branding strategy. Based upon the branding strategy

organizations use carefully targeted marketing to help them get the most out of their

efforts. The gradual success of their brands means that with the passage of time, the

need for further formal marketing efforts reduces thus paving the way for increased

profits and organisational growth. Importantly marketing without a clear brand strategy

is a chaotic and costly exercise. The figure below depicts our approach towards the

development of an effective corporate branding strategy:

Setting

brand

objectives

Segmenting

Target

groups

Brand

Packaging

and

Delivery

Segment

Specific

Strategy

46

10.2.1 Segmenting target groups

The value proposition of the organization must be relevant to its target market which

means that the target market must be clearly defined. If target market is not clearly

identified there has to be a refocus on the identification of the target market and

segmenting it to cater to their specific needs.

The first step in the formulation of a branding strategy is the simple breakdown of the

target audience into segments where outcome objectives and corresponding short

term and long term strategies must differ to be successful. Segmenting of the target

audience should be done on keeping in mind how the three types of branding would

evolve.

• Internal stakeholders like employees

• External stakeholders like value chain partners (customers, suppliers), communities,

govt. agencies, regulators

Segmenting the targets into these groups will help in reinforcing some of the core

dimensions of the brand thus creating a brand impact for each segment.

Components

of Branding

Image Building

Engagement Experience

Stakeholder Experience

• Initial impressions

• Outcome of brand-

Promise

communications

• Measured in terms

of awareness and

perceptions of

customers

• Collective

impressions

• Outcome of the

usage of

product/services

• Measured in terms

of satisfaction and

loyalty

• Lasting impressions

• Outcome of behavior

and actions during

the interaction with

organization

• Project much more

stronger impact than

image-building

47

The communications portion of brand management will help in the assessment of the

product/services relative to that of the best practices. The engagement experience

and stakeholder experience will have greater impact on defining and solidifying the

image of the brand.

10.2.2 Setting the brand objectives

Setting clear objectives aligned to business outcomes is prerequisite to the effective

management of the branding initiatives. Integration of the specific target segments

and different forms of branding will enable the formulation of a framework to define

objectives and establish appropriate brand metrics. Outcome objectives can be either

behavior-based or can be awareness and perception based. This additional detail

and clarity in objectives will help in defining the appropriate awareness and

perception metrics. The chart below provides direction to formulate awareness and

perception based metrics.

The brand should project the organization image, core competencies and

characteristics. The way organization is perceived as well as the words which people

use to describe the organisation will form the basic framework of the brand. A

powerful brand builds credibility and has more influence on the market and motivates

stakeholders to give a preference for the product/service over that of competitor.

Brand objectives should help in knowing the answers to the following questions:

• What should brand do for the organization? (recognition, profits, leadership)

• What should others say about the products or services? (quality and cost vis-à-vis

competitors)

Listing and defining the objectives with specific timelines makes it easier to map out

how to achieve those objectives and accordingly developing a plan of action.

10.2.3 Segment specific strategies

The next step is to develop target specific strategies that help deliver the desired

outcome objectives. Brand metrics are defined at this level. It is crucial to understand

the set of perceptions and actions that drive the outcome objectives for each of the

three types of branding. The mindsets of the different sets of potential stakeholders

are much different from those of the existing ones and accordingly the modus

operandi to motivate prospects and customers also differs.

The effectiveness of the branding strategies can be greatly improved by defining

segment specific brand metrics keeping in view the expected outcome objectives.

Putting the right metrics in place will enable the organization to measure and manage

brand performance more effectively.

48

10.2.4 Brand packaging and delivery

Branding is the identity of an organization in the marketplace. The organisation

image to a great extent is formed by the appearance of the brand packaging.

Packaging is what the organisation image conveys tangibly to the marketplace.

Packaging either has a negative or positive influence on the stakeholder. A

packaging attracting negative impression can ruin the whole efforts of brand building

exercise while a positive reaction can influence a customer to buy. Packaging needs

special attention when a new brand is getting launched while for an already existing

brand it may not be that critical.

Package is an integral part of branding and helps in representing business as a

strong identity. Packaging can be represented by an array of common business tools:

• Business cards and company stationery

• Web sites

• Answering system

• Email system

• Vehicle carrying products etc

All these tools present an image of the organization. These tools speak volumes

about the image of the company and can either strengthen or weaken the brand

value. The image is all in the packaging and delivery to the stakeholders.

Stakeholders will make assessments of the organization based on these brand

packaging and appraisal conveys much about the attitude and priorities of the

business.

10.2.5 Formulation of action plans

Branding is the identity of an organization in the marketplace. The success of the

whole process will depend upon the formulation and execution of an effective action

plan. The outcomes of all the activities mentioned above would be integrated and

represented in an action plan. Action plan would act as a guide to help keep track of

the goals set in the strategy, make decisions and take steps towards achievement of

the goals.

Indian Chamber of Commerce Indian Chamber of Commerce (ICC) has been working since 1925 towards creating a conducive and

sustainable industry growth oriented environment to enable the social, industrial and economic growth

of the country through policy advocacy and consultancy services to serve the nation. The membership

of Chamber comprises several of the largest Corporate Groups in the Country, with business

operations all over the country and abroad. Set up by a group of pioneering industrialists led by Mr. G

D Birla, the Indian Chamber was closely associated with the Indian Freedom Movement, as the first

organized voice of indigenous Indian Industry.

One of the most pro-active Chambers in the East, the ICC has been privileged to interact and host

several of the esteemed Indian Presidents and Prime Minister in the past.

With over 75 years of service to the nation, the ICC retains the character of being the premier

Chamber with senior Indian Industry leaders forming the core of its Executive Committee or the

Governing Board of the Chamber. Its enlightened leadership and membership has enabled the ICC to

move ahead and respond pro-actively to the dynamic changes that have taken place in the world

order and with a vision for the future.

PricewaterhouseCoopers Pvt. Ltd. – Mining Practice

Indian mining industry, one of the largest in world, faces unique challenges for meeting the growing

demand for raw materials. The sector is at the threshold of reforms in the legal and regulatory

environment and the industry players are set to transform into global companies as they hunt for asset

worldwide. The government has stated objectives of attracting private and foreign investments and

initiatives are being taken and contemplated to facilitate the same. In coal mining sector itself, private

sector participation is being encouraged and coal blocks have been allocated for mining, gasification

and liquefaction. As the Indian economy grows further, with resilience in light of global slowdown, it is

faced with energy security concerns, which hinges on increase in domestic production capacities and

acquisition of assets abroad. Private sector companies with coal blocks need to tread the maturity

curve and implement projects. It is expected that the mining sector will have to be prepared to rise to

the challenge fuelling growth engines.

PricewaterhouseCoopers in India is engaged in providing advisory services in mining sector across

the entire value chain of mining, including but not limited to

• Fuel and raw material sourcing strategy

• Nurturing new entrants and growth potentials

• Industry cross border transactions and consolidation

• Process improvement and operational transformation

• Retaining talent and human resource strategy

• Sustainability

• Reforms and restructuring

• Risk management and regulatory compliance

Organiser

Indian Chamber of Commerce

Kolkata Indian Chamber of Commerce ICC Towers 4, India Exchange Place Kolkata - 700001 T: 033 22303242 - 44 F: 033 22313377/80 W: www.indianchamber.net Guwahati Indian Chamber of CommerceHouse No. 209 AIDC R G Barua Road Guwahati: 781024 Assam T: + 91 0361 2461763 F: + 91 0361 2461763 Delhi Indian Chamber of Commerce 323, Ansal Chamber II, 6, Bhikaji Cama Place, New Delhi 110066 Tel : 011 4610 1431 -38 , 4610 1439 Fax: 011 4610 1440 /1441

Contacts

Knowledge Partner

PricewaterhouseCoopers Pvt. Ltd.

Kameswara Rao

Executive Director and Industry Leader

for Energy Utilities & Mining

E-mail: [email protected]

+91 40 6624 6600 (office)

+91 98 480 41352 (mobile)

+91 40 6624 6200 (facsimile) #8-2-293/82/A/1131A Jubilee Hills, Hyderabad Andhra Pradesh Dipesh Dipu

Principal Consultant

E-mail: [email protected]

+91 40 6624 6202 (office)

+91 99 896 00236 (mobile)

+91 40 6624 6200 (facsimile) #8-2-293/82/A/1131A Jubilee Hills, Hyderabad Andhra Pradesh





38 , 4610 1439

Knowledge Partner

PricewaterhouseCoopers Pvt. Ltd.

Kameswara Rao

Executive Director and Industry Leader

for Energy Utilities & Mining

[email protected]

6600 (office)

+91 98 480 41352 (mobile)

+91 40 6624 6200 (facsimile)

293/82/A/1131A – Road No. 36 Jubilee Hills, Hyderabad – 500034

Principal Consultant – Mining

[email protected]

+91 40 6624 6202 (office)

+91 99 896 00236 (mobile)

+91 40 6624 6200 (facsimile)

293/82/A/1131A – Road No. 36 Jubilee Hills, Hyderabad – 500034

India coal summit

Documents

1131a jubilee

financial

foreign exchange

legal due

logistics

long wall

foreign exchange

primary energy