India, Indonesia on Different Coal Paths

India, poised to become the world's largest importer of thermal coal, appears to be opening up its domestic mining sector to foreign competition just as Indonesia, its biggest supplier, is making it harder for exporters.

On a superficial level it appears that India and Indonesia are choosing different paths for their coal sectors, but the policies being pursued by the countries' new, reform-minded leaders may have more in common than first appearances suggest.

India may allow foreign companies to mine coal, as long as they set up units in the country, Reuters reported on Oct. 22, citing a source familiar with the matter.

This would be a major change for the South Asian nation, which has the world's fifth-largest coal reserves but suffers from ongoing shortages because of inefficiencies across the mining, transportation and distribution chains.

Coal mining has been dominated by state-controlled Coal India, which consistently fails to meet targets for production and supply.

What private mining existed in India was thrown into chaos recently by court rulings that found the allocation of coal blocks by the previous government had been illegal, and that these areas would be returned to the state and Coal India.

Prime Minister Narendra Modi now appears to aim to open up the coal mining sector to both foreign and domestic competition, a necessary step if he is to end electricity shortages that threaten to thwart plans to return the economy of the world's second-most populous nation to rapid growth.

The scale of Modi's challenge can be seen by the 37 coal-fired plants that recently had less than four days of stocks left, a situation that results in power cuts, which in turn force businesses and wealthier households to maintain costly diesel-powered generators.

MINING REFORM NOT ENOUGH

Allowing more companies in the mining space may go some way to boosting output and closing the gap between domestic production and demand, which the government estimated at between 185 million to 265 million tonnes by the 2016-17 fiscal year.

But unless the other legs of the Indian electricity system are tackled as well, having extra coal available will be of little use.

Rail, port and other infrastructure will have to be boosted in order to ensure coal can reach power stations.

Most importantly, the pricing of electricity will have to be reformed as many private generators can't run profitably in an environment where their fuel costs are floating but the power they sell is at fixed tariffs.

If Modi is prepared to tackle the state electricity boards, as well as the railways, then his plans to have reliable, and still relatively cheap electricity, may come to fruition.

INDONESIA REGULATING TO SUCCESS?

Modi's plan to free up India's coal sector and boost competition through allowing foreigners to participate looks quite different to the policies of the Indonesian government.

Shipments from the world's largest exporter of thermal coal are likely to decline this month, and possibly for several months to come, as new rules on government permits came into force on Oct. 1.

The regulations require that miners get approvals from the mining and trade ministries before exporting cargoes, a process the coal industry believes may be one burden too many for companies already battling coal prices near five-year lows.

These policies were put in place by the former Indonesian government, which was recently replaced by the administration of President Joko Widodo, who was sworn in on Oct. 20.

Like Modi, Widodo is a known reformer and many members of his new cabinet have been described as technocrats, including Sudirman Said, the new energy and mineral resources minister.

In light of Widodo's anti-corruption crusade, it's likely that the former government's moves to regulate coal mining will be continued, or perhaps even strengthened, given illegal mining and exports have plagued Indonesia.

At the same time, Widodo may take a more conciliatory line about foreign ownership of mines, which was dealt a blow by new laws that force the disposal of majority stakes to domestic investors once the facility has been producing for 10 years.

The trend in Indonesia seems fairly clear, miners will be expected to abide by the laws and pay royalties, and the sector must meet national interest goals by ensuring sufficient domestic supplies, adding value to products and by employing more Indonesians.

For coal mining, enforcing a level playing field, eliminating illegal mining and treating miners equally from a tax perspective could ultimately serve to boost output by encouraging exploration and investment.

However, like Modi in India, Widodo has a long road to travel and many entrenched interests to take on.

By Clyde Russell