Just as global banks desert coal, can India ramp up the sector without foreign investment?

It is not unusual for observers and leaders of an industry to feel nervous in India when their sector begins to collapse in developed countries. But Indian coal industry veterans are unusually sanguine at the moment, even as coal companies show signs of terminal decline elsewhere in the world. The reason: they think that the Indian government and financial institutions have enough money to fund a rapid expansion in the coal sector without foreign investment.

Over the past decade, many global NGOs have stepped up pressure on institutions to divest from coal. This has led, according to a study in 2013 by Oxford University, to the fastest-growing divestment movement in the history of the planet. This movement has gained strength after the study was published, as several big funds and institutions have announced their intentions to divest from coal. However, say industry analysts, market forces are playing a bigger role in the collapse of the coal industry in some developed countries.

Last week, Alpha Natural Resources, the fourth largest coal company in the US, filed for bankruptcy. Analysts expect Peabody Energy and Arch Coal, the two largest public coal companies in the US, to follow suit soon. Early this year, Europe’s largest coal company — Kompani Weglova, owned by the Polish government — closed four mines and downsized to stave off bankruptcy. Coal production in Europe is falling, as European power companies begin the shift to phase out fossil fuels. On the other hand, India is on a rapid expansion of its coal sector. Coal India, the country’s largest producer of coal, is on its way to double its production to 1 billion tonne by 2019. Despite huge investments being planned in solar energy, coal remains the basis of India’s energy plans for the next few decades. Producing so much coal will require investments of at least $20 billion, according to industry insiders. The World Bank, which has funded Coal India in the 1990s, is unlikely to fund coal mining anywhere in the world. “The impact of World Bank withdrawal on India is next to nothing,” says former Coal India chairman Partha Bhattacharya. “Indian commercial banks can now take over.”




On a Roll

Coal India is flush with funds, as it is sitting on a cash reserve of over `50,000 crore ($8 billion). It could generate $2-3 billion internally over the next few years. This still leaves nearly $10 billion for external funding, especially if Coal India is not willing to use up all its reserves. India’s captive plans want to add another 500 million tonnes of capacity. So the coal sector in India would need up to `70,000 crore over the next five years, if its expansion plans are to go smoothly. Will Indian institutions be able to fund this expansion? “It will be a stretch,” says Dipesh Dipu, a coal mining consultant and former director, energy of Deloitte Touche Tomahtsu India. “But it is not unmanageable.”

Current global sentiment against coal means that India will be forced to find its own financial resources for the sector. In recent years, many large funds have committed to withdraw from coal. The anti-coal movement received a shot in the arm in June when the $900 billion Norwegian Government Pension Fund, the largest sovereign wealth fund in the world, announced plans to divest from coal. Recently, Bank of America, a long-time funder of coal mining, declared that it will no longer fund coal mining, primarily because of financial risk. However, many large banks such as Citibank and JP Morgan still fund coal. “It is too complicated to see a trend,” says, Yann Louvel, Climate and Energy Campaign Coordinator of BankTrack, which tracks commercial banks.

Indian banks and financial institutions, however, are sanguine. Solar power is fast catching up, due to falling costs and improvements in technology. “Coal is still the cheapest energy source,” says Arundhati Bhattacharya, chairman of the State Bank of India. “Technology changes fast and we do not know what will happen. But we cannot just sit and wait for it to happen.” The general consensus of analysts is that coal is irreplaceable in India, at least in the next few decades.

The Cost Factor

And yet, some of them look at it differently. While global divestments have no immediate impact on the Indian coal sector, declining demand and prices may have more impact. “Market forces in the fossil fuel industry impact the industry more than divestments,” says Nathaniel Bullard, global head of executive insights at Bloomberg New Energy Finance. “Independent of politics, economics sometimes favours the renewables.” In India, falling prices of coal may also have a big impact on the current expansion.

Due to the poor quality of Indian coal, the country has to invest large amounts to produce clean coal. Transporting of coal across India has been difficult and expensive. But the southern and western states may find it easier and cheaper to import quality coal directly from Indonesia, which may have to find new buyers due to a declining market in China. In 2014, Chinese imports fell 10% compared with 2013.

Foreign players deliver coal where it is needed while Coal India delivers at the mines. States such as Kerala, Tamil Nadu, Maharashtra and Karnataka may find import a better option. Considering that the coal prices are low, is there a justification for investing so much in domestic capacity?

Later this year, governments of all countries are meeting to thresh out a legally-binding agreement to limit carbon dioxide emissions. India may not be a part to a legally-binding agreement, but it may be impacted indirectly, especially if China throws in the towel. So does it make sense to ramp up coal production quickly and then negotiate from a perch, as China has done?

(Additional reporting by Debjoy Sengupta)