Doubts on Coal India’s coal reserves
By Joe Leahy in Mumbai and Amy Kazmin in New Delhi
Published: September 12 2010 18:59 | Last updated: September 12 2010 18:59
Coal India is set to begin a roadshow to promote what is expected to be India’s biggest stock listing, even as tightened environmental regulations and a Maoist insurgency threaten to render much of the state-owned miner’s reserves inaccessible.
The company’s biggest coal fields are located in remote regions dominated by Maoist rebels who often target business activities for extortion, disrupt roads and railway lines used to transport coal and are suspected of involvement in coal theft.
Moreover, the coal ministry has yet to persuade Manmohan Singh, the prime minister, to roll back an order by the environment ministry that this year designated areas covering about 40 per cent of Coal India’s reserves as “no-go areas” for mining to stop the wholesale felling of eastern forests.
“Although India has large reserves, actual production of coal has only been growing at 6-7 per cent per year,” said Arvind Mahajan, head of natural resources at KPMG.
Coal India hopes to raise up to Rs150bn ($3.2bn) from the sale of a 10 per cent stake. That would make its initial public offering bigger than India’s largest completed listing, the $3bn offering of domestic electricity producer Reliance Power in early 2008.
Coal India claims to be the world’s largest coal producer and accounts for 85 per cent of production in India, which has the fourth-largest reserves on the globe. But it recently revised down its annual production target from 520m tonnes to 486m tonnes, citing delays in environmental clearance for mine expansion. Meanwhile, Indian coal imports are surging, with KPMG estimating a domestic shortfall of 189m tonnes a year by 2015.
India’s coal ministry has urged Mr Singh to pare back the environment ministry’s designated “no-go” order to regions accounting for just 10 per cent of coal reserves. Coal India’s prospectus said the issue should be resolved in a few months through “mutual consultation”. But it said: “If we are unable to produce coal from such designated areas, estimates of our reserves could be adversely affected.” In its prospectus, Coal India admits to problems with insurgency and theft from its mines by illegal miners and others, especially in eastern regions with a heavy Maoist presence.
In spite of the problems, bankers expect a strong reception for the offering given its near monopoly status and demand from the power sector. “It just depends on the price,” said one person familiar with the deal.
Citigroup, Morgan Stanley, Kotak Mahindra Capital, Enam Securities, Deutsche Bank, and Bank of America-Merrill Lynch are managing the IPO. The offering is part of government plans to raise $8.6bn through stake sales in the fiscal year to March 2011.
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Scramble for coal reaches Indonesia
By Anthony Deutsch, Amy Kazmin and Leslie Hook
Published: September 8 2010 16:52 | Last updated: September 8 2010 16:52
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The battle for resources between India and China has arrived in Indonesia, where Asia’s emerging giants are scrambling to secure the vast supplies of thermal coal needed to fire their electricity plants and power economic expansion.
But a shortage of attractive, large-scale producers for sale and restrictive business conditions are driving fierce competition for assets in the world’s leading exporter of the commodity.
Often unable to buy mines outright, Indian and Chinese companies have secured a series of billion-dollar deals in recent months, agreeing to invest heavily in the construction of railways, power plants and ports, in exchange for coal.
Such long-term commitments show just how eager they are to buy into Indonesia.
Analysts say the model is likely to become more common as India and China aggressively try to make up a shortage of hundreds of millions of tonnes of coal in coming years. It is also a logical fit for their southern neighbour, which is trying to attract $160bn in foreign investment to revamp crumbling roads, power plants, ports and bridges.
Indonesia’s vast reserves of thermal coal are a cheap and relatively close source for Asian buyers, but government red tape, corruption and a lack of buying opportunities are hampering possible mergers and acquisitions.
Still, there has been no shortage of activity in the sector this year, as India has made strong inroads.
Adani Group, the Indian conglomerate, said in August it was investing $1.6bn to build a railway line and coal terminal in remote Sumatra. That deal, which trumped an earlier Chinese bid, will increase Adani’s Indonesian supplies, although it did not say by how much.
India’s state-controlled power generator, NTPC, the country’s largest power producer, also said it aimed to acquire stakes in two, as yet unnamed, Indonesian coal mines.
Tom Aaker, Standard Chartered’s chief executive in Indonesia, expects the “huge appetite from overseas” to drive a wave of buying in the sector in the near future.
“They are trying to build their economy ... so they are looking for a source of raw material and if they can own that source, it’s even more secure,” Mr Aaker told the Financial Times. “So, they are coming here all the time saying: ‘Do you know anyone who has a coal concession for sale, because we want to buy it’.”
And while China and India are leading the charge, Thai, Korean, Italian and Japanese companies are also on the lookout for acquisitions or coal-sourcing deals.
Churchill Mining, listed in London, is looking to sell a $1bn coal asset on Borneo and says it has received strong interest from the Indian coal majors, including Coal India, that have yet to complete any deals in Indonesia.
China became a net importer of coal in 2007 and a shift towards Indonesia followed soon thereafter. In July Shenhua, China’s largest coal producer, announced a $331m coal project in Sumatra, and last October China’s sovereign wealth fund injected $1.9bn into Bumi Resources, Indonesia’s largest coal producer.
Rather than just mine resources, China is building two 150MW power generators, which will supply the local grid. “It’s a win-win, since Shenhua gets the coal and the local economy gets the power,” says Bai Zhongyi, an analyst at UBS.
Shenhua operates power stations and railways in China, and is expanding coal production abroad with the goal of producing 15m tonnes overseas by 2015, up from none last year.
The tie-up between Bumi and China Investment Corp, the sovereign fund, was seen as a further sign of China’s interest in the sector. Bumi said it expected to sell 13m tonnes of coal to China this year. China’s coal consumption was almost half of the global total last year, according to the BP statistical review.
It is poised to overtake Japan as the largest importer of thermal coal. India, meanwhile, consumes about 7.5 per cent of global exports, but that number is set to grow. “If India ramps up and starts competing with China for resources [abroad], things could get quite heated up in terms of the price,” Mr Bai said.
Indonesia recently overtook Australia as the world’s largest supplier of thermal coal. Exports jumped fourfold between 2000 and 2010. Production was projected to rise 7 per cent to 280m tonnes in 2010, led by purchases from China, India, South Korea, Japan and Taiwan, said the Indonesian Coal Mining Association.
“The industry as a whole is gearing up for exports,” said Rudi Vann, a regional coal analyst for Wood Mackenzie, an energy consultancy, citing the recent investments in Indonesia. “We are talking about quite a lot of activity. A major chunk of it is to China and India.”
SYDNEY―The idea of peak oil―the point at which global production reaches its maximum―has fixated the energy industry for years. Now, China is grappling with a new worry: peak coal.
State-run media reported that Beijing is considering capping domestic coal output in the 2011-2015 period, partly because officials worry miners are running down reserves too quickly to meet the needs of a rapidly expanding economy.
"China accounts for around 14% of global coal reserves but its share of global coal consumption is already over triple that at 47%, which is unsustainable," Hong Kong-based brokerage CLSA Asia-Pacific Markets said in a report last month.
Imposing a cap would be significant as China's mining sector is already finding it hard to keep up with domestic coal demand, which has grown around 10% annually over the past decade.
Its net coal imports exceeded 106 million metric tons in the first nine months of the year―higher than the level for 2009 as a whole―and state companies have been aggressively acquiring overseas coal assets to secure long-term supply.
In the three years to September 2010, Chinese companies spent $20.96 billion on overseas coal-sector acquisitions, according to Dealogic.
An output ceiling would also underpin regional coal prices, which are near six-month highs on expectations that China will import record volumes of coal this month and in December.
While China hasn't declared publicly it will impose a coal production cap, the idea is gathering momentum.
Zhang Guobao, head of China's National Energy Administration, said in a speech on Oct. 27 that he doesn't favor the country's coal output expanding above four billion tons a year.
Policy makers are mulling an annual cap of between 3.6 billion tons and 3.8 billion tons in the next five-year plan, running from 2011 to 2015, the state-run Xinhua news agency reported earlier.
This would be unlikely to hurt large state-owned miners, such as China Shenhua Energy Co., as they have invested in modern equipment and can generate economies of scale. Shenhua aims to double its annual coal output capacity to 400 million tons in the 2009-2014 period.
However, small mines and township operations will be under increasing pressure. Shanxi province has closed scores of small mines in a bid to improve safety and efficiency, and Inner Mongolia region and Henan province are taking similar steps.
Even if no official limits are introduced, China can't keep growing coal output much beyond another decade, analysts say. The mining sector is constrained by chronic infrastructure bottlenecks, especially road and rail, and those coal deposits that are easiest to mine have already been tapped.
Experts are starting to predict when China's coal reserves will run out―a nightmare scenario in a country where 70% of its energy is derived from coal.
According to BP PLC, China can only continue at current rates of production for 38 years before its coal reserves are exhausted. That compares with 245 years in the U.S., and 105 years in India.
BP estimates that China had 114.5 billion tons of proven coal reserves at the end of 2009, ranking it third behind the U.S. and Russia. The International Energy Agency says China could have as much as 189 billion tons of coal that it hasn't tapped yet.
Calculating the size of China's coal reserves isn't easy. The government doesn't publish data on discoveries or how much coal can still be recovered from existing mines. Complicating matters further, China's National Bureau of Statistics recently stopped issuing monthly output figures.
In addition, not all coal has the same energy content. That's significant as many new discoveries in Inner Mongolia are of poorer quality than the coal reserves being depleted in Shanxi.
But the strength of China's coal demand, and moves by miners to raise output in step, is worrying the market as well as Beijing.
Even if China's annual coal demand growth halved to 5% then the country would run out of coal in 21 years unless it finds material new deposits, CLSA says, using 114.5 billion tons of reserves as a benchmark.
The picture isn't much brighter when calculations use IEA estimates of China's proven reserves. Annual consumption growth of 5% would see China run out of coal in 28 years, it forecasts.
"With either estimate, it is clear that the rapid increase of coal production puts China's energy security at risk," CLSA says.
Write to David Winning at david.winning@dowjones.com