Fancy a truckload of the world’s biggest coal miner? New Delhi is planning to sell a 10 % stake in Coal India Ltd. Such a deal could be worth about Rs19,700 crore ($2.9 billion) at current market prices, and would reduce the government’s share in the company to about 70%. Investors minded to buy into coal in spite of its contribution to climate change and the fact that global demand is probably in terminal decline could do worse than have a look.
Coal India dug up about one tonne out of every 14 mined worldwide during 2015, making it far and away the biggest producer in volume terms. It’s also in the almost unique position among large coal miners of making profits in excess of its cost of capital.
Coal India is the only large coal miner whose return on capital is above its cost of capital. Not only that: Thanks to its position as a government-controlled corner of India’s regulated electricity market, the company been consistently profitable, posting positive results in every one of the past 24 quarters for which Bloomberg has data.
So what’s not to like?
For starters, there’s the issue of competition. Coal is traditionally a near-monopoly in India, with Coal India meeting about four-fifths of demand while state-owned Singareni Collieries Co. and various importers make up the balance. Other companies are permitted to mine product for use only in their own power and industrial plants, and forbidden from selling to third parties.
That’s set to change. The government will auction four mines in the year starting 1 April that will be permitted to sell coal on the open market, Union coal secretary Susheel Kumar said in New Delhi earlier this month.This may prove to be only a toe in the water of deregulation—but a more open market for coal could cause serious problems for incumbents, given their extremely low productivity.
The average employee at Coal India produces about 1,811 metric tonnes of coal a year, less than a quarter of the 8,388 tonnes at Indonesian pits and well below the 30,746 tonnes at major US coal miners, according to Michelle Leung, an analyst with Bloomberg Intelligence.There’s another problem.
Coal is still fundamental to India’s energy mix, but it’s under growing threat from the plummeting cost of renewables.
Heat and dust
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