Expect Private players to mine coal soon - Reliance Power, Tata Power, Jindal group, Gujarat NRE could benefit

We had already written extensively on how Coal will rule the energy markets in India at least in the next 10 years. The article can be accessed HERE. We had even indicated that the coal mining industry will thrown open to private players in the near future. The recent turnout of events in the last 2 months were indicating the same. Today's announcement that there will be a Coal regulatory authority setup in India in the next 100 days adds truth to our expectations.

Currently the coal mining in India is dominated by Coal India Limited, which contributes for 85% of India's coal output. CIL is followed by Singaneri Collieries, an AP state govt venture with the Centre which contributes for around 9% of the total output. The remaining 6% is shared by captive users of coal. The captive users include Steel companies, Cement majors and few Power companies. Going forward the captive users will also include Reliance Power, Tata Power for whom the coal blocks will be allotted / have been allotted for the UMPPs awarded to them.

Currently, India produces about 450 million tonnes of coal a year and this is short by 50 million tonnes of demand. This gap is bridged by imports. However, the demand is set to more than double to about a billion tonnes of coal in another 7 years and this will widen the deficit as well. The widened deficit will ask for around 150 million tonnes and with the rising coal prices, the imports would become a costly option.

This has always promoted the government to look at opening up of the coal mining sector for the private players. The government is currently unable to up the production drastically since it would require huge investments. The opening up of coal mining had been on the agenda even from 2007, but it was constantly opposed by the left parties. However, now that the things have changed, the govt is set to open up the sector.

Earlier, President Patil had indicated that the government wants to carry forward the reforms in the Coal sector. The entry of private players is the big reform that the industry needs currently and she might have referred to that. Today, the coal ministry has announced that it has setup a 100 days agenda in which it would look at setting up a Coal regulatory authority.

Why would a sector that is completely dominated by one government player (CIL) need a regulatory authority? This only means that a lot of players are going to come in and that is where the regulator may be required. We are very positive that we would hear something of that sort from the budget which is few days away.

But, who would benefit from such an announcement? Certainly, the players will be selected based on some performance metrics or track record. Also, there are higher chances that the captive users who have been mining so far will be allowed to mine for commercial reasons as well.

The domestic players who can be huge beneficiaries include Tata power, Reliance Power, Jindal group, Gujarat NRE coke, Sesa Goa These players have been either captive users of coal or have been into mining with greater expertise.

To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com