Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4714-IN

STAFF APPRAISAL REPORT

INDIA

DUDHICHUA COAL PROJECT

February 28, 1984

Industry Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Rs 1.00 = Paise 100

US$1.00 = Rs 9.75Rs 1.00 US$0.103Rs 1 million = US$102,600

(Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 9.75,which represents the projected exchange rate over the disbursement period)

FISCAL YEAR

April 1 - March 31

WEIGHTS AND MEASURES

1 British thermal unit (Btu) 0.252 kilocalories1 cubic meter (m 3 ) = 1.308 cubic yards

1 gigawatt hour (GWh) - 1,000,000 kilowatthours1 kilocalorie (kcal) = 3.97 British thermal units1 kilocalorie per kilogram = 1.805 British thermal units per

(kcal/kg) pound1 kilogram (kg) = 2.205 pounds1 kilowatt (kW) = 1,000 watts1 megawatt (MW) = 1,000 kilowatts1 ton = 1,000 kilograms

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BCCL - Bharat Coking Coal Ltd.BICP - Bureau of Industrial Costs and PricesBPE - Bureau of Public EnterprisesCCL - Central Coalfields Ltd.CEA - Central Electricity AuthorityCIL - Coal India Ltd.CMO - Central Marketing Organization of CITLCMPDI - Central Mine Planning and Design InstituteDOC - Department of Coal

ECL - Eastern Coalfields Ltd.GOI - Government of IndiaGSI - Geological Survey of IndiaICB - International Competitive BiddingIISCO - Indian Iron and Steel CompanyIR - Indian Railways

MEC - Mineral Exploration CorporationMP - Madhya PradeshNEC - North Eastern CoalfieldsNHPC - National Hydro Power CorporationNTPC - National Thermal Power CorporationOMS - Output per Manshift

ONGC - Oil and Natural Gas CommissionPLC - Planning Commission

SCL - Singareni Collieries Ltd.SLC - Standing Linkage CommnitteeSEB - State Electricity BoardTISCO - Tata Iron and Steel CompanyUP - - Uttar Pradesh

WCL - Western Coalfields Ltd.WGEP - Working Group on Energy Policy

FOR OFFICIAL USE ONLY

INDIA

DUDHICHUA COAL PROJECT

TABLE OF CONTENTS

Page

I. INTRODUCTION ............................................. 1

II. THE ENERGY SECTOR ........................................ I

A. Supply and Demand ................................... 1B. Energy Sector Strategy .............................. 3C. The Coal Sector ..................................... 3

1. Background ..................................... 32. Reserves ....................................... 43. Coal Production and Transportation .... ......... 6

III. THE MARKET FOR INDIAN COAL .............................. . 7

A. Indian Coal Supply/Demand and Prospects .... ......... 7

1. Coal Supply .................................... 82. Coal Demand .................................... 10

B. Coal Supply Allocation and Marketing .... ............ 13

1. Supply Allocation .............................. 132. Marketing ...................................... 14

C. Pricing ........... 14

1. Prices and Pricing Policy ...................... 142. A Rational Approach to Coal Pricing Policy

for Indian Coals ............................... 17

IV. THE BENEFICIARIES ........................................ 19

A. Coal India Ltd. ..................................... 19

1. Organization and Management .................... 192. Operations ..................................... 213. Financial Position ............................. 234. Development Strategy and Investment Plan .... ... 24

B. Central Coalfields Ltd. ............................. 26

This report was prepared by Messrs. J. Barrientos, B. Stenberg, J. Strongmanand Ms. H. Wu of the Industry Department and Mr. S. Luode (YPP).

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TABLE OF CONTENTS (Cont'd) Page

V. THE PROJECT . .............................................. 29

A. Project Objectives .................................. 29

B. Project Description ................................. 29

1. Location ....................................... 29

2. Reserves ....................................... 30

3. Mining ......................................... 30

4. Infrastructure ................................. 31

5. Consumers and Transportation ................... 32

6. Environment .................................... 34

C. Project Execution and Implementation ................ 34

VI. CAPITAL COSTS, FINANCING AND PROCUREMENT ...... .. ......... 38

A. Capital Cost Estimate ............................... 38

B. Financing Plan ...................................... 40

C. Procurement and Disbursement .# ...................... 42

VII. FINANCIAL ANALYSIS ................... .................... 43

A. Coal India Ltd. ..................................... 43

B. Central Coalfields Ltd. ............................. 48

C. Dudhichua Coal Project .............................. 49

VIII. ECONOMIC ANALYSIS ........................................ 51

A. Least Cost Solution ................................. 51

B. Economic Rate of Return ............................. 52

IX. AGREEMENTS ....................... ........................ 53

CHARTS

5-1 Dudhichua Project Management Organization .... ....... 35

5-2 Dudhichua Implementation Schedule ................... 37

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ANNEXES

2-1 Primary Energy Production, Trade and Consumption2-2 Energy Consumption by Sector2-3 Findings and Recommendations of the Working Group on Energy Policy2-4 Note on Indian Power Sector2-5 Note on Indian Railways3-1 World Coal Market3-2 CIL - Planned Coal Production by Grade, FY19823-3 Coal Demand by Producer, FY19893-4 Assumptions Used in Coal Demand Projections3-5 Coal Price Schedule3-6 Sales Taxes and Levies on Coal4-1 CIL Corporate Organization4-2 Activities and Financial Performance of CIL Subsidiaries4-3 Scope of Work for Study on Budgetary Systems4-4 Scope of Work for Technical Assistance on Operational Practices in

Open Pit lines4-5 CIL Financial Statements4-6 CIL Investment Plan4-7 CCL Corporate Organization5-1 Railways Capacity of Selected Routes5-2 Terms of Reference for Project Implementation Manual6-1 Equipment Cost Estimate6-2 Bank-Financed Goods6-3 Procurement Schedule for Bank-Financed Goods6-4 Disbursement Schedule for Bank Loan7-1 Assumptions Used in the Financial Projections7-2 Pro Forma Financial Statements for Coal India Ltd.7-3 Pro Forma Financial Statements for Central Coalfields Ltd.7-4 Financial and Economic Rates of Return - Assumptions and Calculations8-1 Economic Rate of Return - Cost and Benefit Streams

MAPS

IBRD 17252 Principal Coalfields in IndiaIBRD 25057 Singrauli CoalfieldsIBRD 25055 Dudhichua - Project Area

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DOCUMENTS AVAILABLE IN THE PROJECT FILE

Operational Statistics 1974-75/1979-80, Coal India Ltd.Annual Reports and Accounts, Coal India Ltd. 1975-76 to 1981-82Annual Sales and Marketing Review, Coal India Ltd. 1981-1982Feasibility Report for Dudhichua Coal Project, CMPDI, Ranchi, August 1982Annual Reports, Department of Coal 1979-80 to 1981-82Coal and Coal India, Training and Management Development Wing, Coal India Ltd.Appraisal Report on Coal India Project Management, Fluor Engineers, March 1983Theory and Pricing for Public Sector Undertakings, A. Ghosh, Sept. 1982Singrauli Coalfields, The Future Energy Capital, Central Coalfields Ltd.,

July 1982Review and Assessment of Coal India Planned Investment Program, British Mining

Consultants, March 1983Singrauli Coalfields, A Profile of Program and Future Prospects, Central

Coalfields Ltd., October 1980Project Monitoring Report, Quarter ending September 1982, Central

Coalfields Ltd.

I. INTRODUCTION

1.01 The Government of India (GOI) has requested a Bank loan to helpfinance the cost of the initial development of the Dudhichua open pit coalmine located in Singrauli, at the state border between Madhya Pradesh andUttar Pradesh (Map IBRD 17252). The Dudhichua mine will have a final capacityof 10 million tons per year (tpy) which is to be developed in two phases, thefirst of which (5 million tpy) is included in the proposed project's scope.The project will be owned and operated by Central Coalfields Ltd. (CCL) awholly-owned subsidiary of Coal India Ltd. (CIL), a Government undertaking.The Dudhichua mine forms part of GOI's plan to increase the utilization ofindigenous energy resources. In order to meet coal demand for powergeneration, the Government has chosen the strategy of basing the expansion ofcoal production on the development of large scale, mechanized open pit mines,such as Dudhichua.

1.02 The financing requirement of the Project, including escalation,contingencies, interest during construction and working capital, are estimated

at US$373 million, of which about US$128 million is in foreign exchange. Theproposed Bank loan of US$151 million would cover about 40% of the financingrequirements. The balance of US$222 million will be provided from internallygenerated funds of CIL and from Government resources.

1.03 The proposed project was submitted by GOI for the Bank'sconsideration in July 1982, and a pre-appraisal mission visited India inSeptember/October 1982. It was appraised in March 1983 by a missioncomprising Messrs. J. Barrientos (Chief), P. Kotschwar, B. Stenberg and J.Strongman of the Industry Department, Mr. S. Luode (YPP), and Messrs. B.Samuelson and P. Smallman (consultants).

Il. THE ENERGY SECTOR

A. Supply and Demand

2.01 Coal is India's most abundant indigenous energy source. Total coalresources 1/ are estimated at over 112 billion tons equivalent to about 61billion tons of oil equivalent (toe). Of these resources, about half(30 billion toe) are considered to be technically and economically recoverablereserves given present conditions. By comparison, India's prognosticrecoverable hydrocarbon reserves were recently estimated at 6.5 billion toe.Based on its abundant coal reserves, the Indian economy has developed overtime with coal as the main energy source. In 1981/82, India produced 125million tons of coal and 6 million tons of lignite which accounted for 54% and1% respectively of commercial energy supply. Hyoroelectric and nuclear powergeneration provided 12% of primary energy supply and oil represented about 33%of energy supply as shown in Annex 2-1 and summarized in the table below.About 55% of petroleum products were of imported origin and the cost ofimported oil represented a major burden for the balance of payments, amountingto US$6 billion in 1981/82 or over 70% of merchandise export earnings.

1/ Contained in seams greater than 0.5 metres and at depths of up to 1,200metres.

India - Commercial Energy Supply(million tons of oil equivalent) a/

Average AnnualGrowth Rate (%)

Fiscal Year 60/61 70/71 80/81 81/82 1960-70 1970-80

Coal & Lignite 27.8 37.1 58.2 63.5 2.9 4.6Petroleum 7.9 19.0 34.7 38.4 9.2 6.2Hydro & NuclearPower 1.9 6.6 11.9 13.7 b/ 13.2 6.1Total 37.6 62.7 104.8 115.6 5.2 5.3

a/ Based on the following conversion factors: one ton of oil equivalent(toe) is equal to 2 tons of domestic coal; 5.88 tons of lignite; 0.94 tonsof refined petroleum products; 1,235 cubic meters of natural gas; 4,166kWh of hydro and nuclear power.

b/ Estimated.

2.02 In 1980/81, the industrial sector accounted for 55% of India'scommercial energy consumption, up from 43% in 1960/61 as shown in Annex 2-2and summarized as follows:

India - Sectoral Breakdown and Growth of Commercial Energy Consumption a/(percent)

Average AnnualGrowth Rate (%)

Fiscal Year 60/61 70/71 80/81 b/ 1960-70 1970-80

Households 14.9 13.7 11.2 4.6 4.8Agriculture 1.9 3.4 6.3 11.8 11.2Industry 43.4 48.9 55.5 6.7 5.8Transportation 36.9 29.8 23.4 3.2 2.0Other 2.9 4.2 3.6 9.3 2.8

Total % 100.0 100.0 100.0 5.4 4.5

Total (in million toe) 30.9 52.4 81.6

a/ Coal, lignite and oil used for power generation are excluded from theseconsumption trends; electricity consumption is included but on a deliveredbasis to consumers.

b/ Provisional.

Source: Working Group on Energy Policy; Ministry of Petroleum, Chemicalsand Fertilizers; and Department of Coal.

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B. Energy Sector Strategy

2.03 GOI's energy policy has been based on the principle of maximizing thedevelopment of indigenous resources and also, more recently, on encouragingimproved efficiency of energy utilization. A comprehensive study on India'sfuture energy supply and demand prospects undertaken by the Working Group onEnergy Policy (WGEP) was published in 1979. The findings and recommendationsof the WGEP are given in Annex 2-3. In line with this policy, GOI isemphasizing the development of coal and of power generation utilizing coal orhydro resources, and has substantially increased the investment in thesesectors in recent years. Preliminary figures call for coal production toincrease to 232 million tpy by the end of the Seventh Plan representing anannual growth rate of 8.0% and for electric power generating capacity to morethan double to 74,000 MW with 59% of the incremental capacity by coal-firedunits, 39% by hydro and 2% by nuclear. Based on GOI's estimates coal willcontinue to be the most important energy source in India in the future and itscontribution to the country's energy requirements will remain at about 50%over the next decade. GOI is also making a concerted effort to accelerate oiland gas development both through national oil companies and by foreign oilcompanies who have been invited to submit bids for exploration and productionsharing on many blocks both offshore and onshore. However, despite theseadvances, India will remain dependent on imported oil to meet a significantpart of its primary energy requirements, in particular, for the growing demandin transport.

2.04 The Bank's role in the energy sector has been most extensive in thepower sector. In the past thirty years fourteen loans totalling US$1,133million and fifteen IDA credits totalling US$2,096 million have been made forIndia's power projects. A basic account of the Bank's role in the powersector is given in Annex 2-4.

2.05 More recently, the Bank has expanded its assistance into the oil andgas sector, responding to changes in the needs and priorities of the Indianenergy sector over the past decade. Four loans totalling US$940 million havebeen made to the Oil and Natural Gas Commission (ONGC) for oil and gasexploration and development; a US$200 million loan was also made in April 1982for the modernization of several refineries. The Bank's role in the oil andgas sector has addressed several inter-related aspects including providingpolicy advice on hydrocarbon exploration, development, processing andutilization and strengthening the technical capabilities and financialpositions of project entities.

C. The Coal Sector

1. Background

2.06 The coal industry in India originally developed with a large numberof small, independent mines. In 1956, some of the producers were taken overand consolidated into one larger government-owned company (the National CoalDevelopment Corporation). Subsequently, in the early 1970s almost the entireindustry was nationalized and in 1975 the Coal India Ltd (CIL) group ofcompanies was formed which accounted for 88% of India's coal production in1982/83. In addition to CIL there are three other coal producers and onelignite producer. The other coal producers are Singareni Collieries Ltd.(SCL), with 10% of total coal production, which is owned by GOI and the State

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Government of Andhra Pradesh, and captive coking coal mines of theprivately-owned Tata Iron and Steel Company (TISCO) and the government-ownedIndian Iron and Steel Company (IISCO) - 1% each of total coal production. Inaddition to coal production, lignite is produced by the 100% government-ownedNeyveli Lignite Corporation in the state of Tamil Nadu which produced 5.9million tons of lignite in 1981/82.

2.07 The Department of Coal, Ministry of Energy (DOC) is in charge ofpolicymaking in the coal sector, and it monitors and coordinates activities inthe sector. This includes all matters pertaining to the production, supply,distribution and prices of coal. The DOC is responsible for theadministration of various Acts relating to coal and lignite production inIndia, as well as for approving the annual production targets and investmentand operating budgets for the government-owned coal/lignite mining companies.The Planning Commission (PLC) scrutinizes and reviews the coal sectorproduction and investment program and sanctions linkages between new mines andmajor consumers.

2.08 The Bank has made one loan for a coking coal project to the IndianIron and Steel Company in 1961 for US$35 million (Loan 290-P-IN). Activity inthe sector resumed with a Sector mission in 1980, following which the IndiaCoal Sector Report, Report 3601-IN, September 1982 was issued. That reportprovided a basic introduction to the sector and addressed various issuesregarding coal exploration, production, investment, transportation,consumption and pricing which were considered important to the futuredevelopment of the sector. In particular the report proposed a number ofrecommendations designed to (i) improve the efficiency of existing coalexploration and mining operations; (ii) reduce transportation bottlenecks forcoal; (iii) improve project implementation capabilities and maximizeproduction growth; and (iv) establish the industry on a sound financial basisthrough economic pricing policies and appropriate financing and resourcemobilization strategies. Subsequently, the GOI accepted many of therecommendations and has taken steps to implement them as well as requestingBank assistance in financing certain projects in the sector. The proposedproject would support further improvements in the sector, first, by providingfinancing to the sector and, second, by supporting a number of importantactions or studies on which subsequent action will be taken, regarding coaltransportation (para. 2.16), supply/demand and linkages (para. 3.13), pricingand resource mobilization (para. 3.28), operating efficiency of open pit mines(para. 4.10), cost control and budgeting (para. 4.07) and project management(para. 5.20). The GOI has also requested Bank financing for a second project,the Jharia Block 2 Coking Coal Project, and this is being processed separatelyon a later timetable.

2. Reserves

2.09 India's coal reserves 1/ are estimated at 86 billion tonnes of which78% are thermal coal, used primarily for heat and steam generation, and 22%are coking (i.e. metallurgical) coal used in steel making as shown below:

1/ Contained in seams of 1.2 metres and above and at depths of up to 600metres.

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India - Coal Reserves(million tons)

Proved Indicated Inferred Total

Coking Coal 9,597 7,263 1,891 18,751Thermal Coal 15,096 29,498 22,233 66,827Total 2 4 . 6 9 3 _ 24.124 85.578

Source: 1981-82 Annual Report, Department of Coal.

2.10 Basic geological exploration is undertaken by the Geological Surveyof India (GSI) which is responsible for regional prospecting/reservesassessment. Detailed exploration including proving up reserves for minefeasibility work is undertaken by the government-owned Mineral ExplorationCorporation (MEC) and by the Central Mine Planning and Design Institute(CMPDI), a subsidiary of CIL. India's coal reserves are found mainly in theeastern part of the country (MAP 17252) where extensive exploration has takenplace in the past. More recently, the rapid growth of demand by consumers inwestern India, especially in the Bombay area and in Gujarat, has generated aneed for new coal developments in central India. In order to meet this need,priorities have been adjusted to emphasize coal exploration in Maharashtra andwestern Madhya Pradesh. This is a sound approach. As new deposits areidentified and subsequently developed in these areas over the next decade,this strategy is expected to be successful in making coal supplies morereadily available without the long transportation linkage from the distanteastern coalfields.

2.11 Much of the known reserves in eastern India are located in deepdeposits in Bihar and West Bengal which result in difficult miningconditions. A priority has also been given to identifying large coalfieldswith shallow deposits which can be developed with large scale open-pit miningtechnologies. This is a sound strategy which has resulted in several suchdeposits being identified in recent years. The largest of these are theKaranpura and Singrauli coalfields with estimated coal resources of 15 and 10billion tons respectively. Other important areas are the Obra coalfield (4billion tons), the Wardha valley (4 billion tons) and the Ib valley (2 billiontons). So far, of these various areas only the first three have beendeveloped. The other two are presently being explored.

2.12 There is a wide variation in the quality of thermal coal reserves.Useful calorific value 1/ ranges from 1,300 kcal/kg to over 6,200 kcal/kg.There is also a wide variation in the quality of coking coal reserves with ashcontent varying from 18% to over 35%. The bulk of the thermal coal reservesare in the 3,500-4,500 kcal/kg range of useful calorific value, the bulk ofcoking coal reserves in the 26% to 32% range of ash content. To date, thecoking coal reserves have been relatively more extensively explored anddeveloped than the thermal reserves, and as a result, coking coal reservesaccount for about 39% of proven total coal reserves. Reserves of high qualitythermal and coking coals are limited and both are in short supply. Mostthermal coals require certain preparation before use, which generally takes

1/ Useful calorific value is derived from the gross calorific value afterallowing penalties for ash and moisture content.

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the form of separation of shale and rock from the coal by hand picking andsome screening of material. About 90% of the coking coal needs to be washedin order to reduce the ash content to more acceptable ranges for feed to thesteel mills.

3. Coal Production and Transportation

2.13 Coal production was 130.6 million tons in 1982/83, of which about 60%was from underground mines and the balance from open-pit. Total employment inthe coal sector in India in December 1982 was about 723,000 employees of whichabout 50% were in clerical or unskilled manual grades. The degree ofmechanization in Indian underground mines is low compared to the majorunderground coal producing countries in the world. About 96% of undergroundcoal mining in India is by manual methods and only 4% by mechanizedoperations. All of the mechanized underground mining has been introduced byCIL since its formation and is still under implementation and has not reachedfull production. Output per manshift (OMS) averages 0.55 tons in undergroundmines compared with 1.5-3.0 tons in the deep older mines in Europe and 8-12tons in the new, shallower, highly mechanized underground mines in Australia,South Africa and North America. Given the relative shortage of capital andsurplus of labor in the Indian economy, it is not economically justified forIndian underground mines to try and reach a similar degree of mechanization asthe capital intensive mines in industrialized countries since the relativevalues of capital and labor are different. The Indian industry isnevertheless targeting a 10-20% improvement in average underground OMS by theend of the decade. This is considered appropriate and achievable based onrelatively simple measures to increase mechanization of coal extraction,handling and loading and on improved training of the work force and upgradingof unskilled to semi-skilled capabilities.

2.14 Most Indian open-pit coal mines are presently small to medium size(1-3 million tpy) compared with the world coal industry. Consequently, Indianequipment (35-85 ton trucks, 4-10 m3 shovels and 10 m3 bucket/50 m boomdraglines) are presently somewhat smaller than can be found in large open-pitcoal mines worldwide (120-200 ton trucks, 15-20 m3 shovel and 30-40 m3

bucket/90-120m boom draglines). The Indian coal industry is progressivelymoving towards larger mines and equipment. This is a desirable policy sincelarger operations offer economies of scale and lower unit production costs.Progress has been cautious since the use of very large equipment brings withit an inherent risk that the breakdown of a single piece of equipment willcause a much greater production loss than the failure of a small item ofequipment. The move to larger equipment has also been impeded by a lack offoreign exchange since the largest equipment must, for the most part, beimported. Further, in the case of dump trucks, moving to sizes above 120 tonscapacity involves a shift in technology from mechanical to electrical driveand, therefore, requires the acquisition of new skills and maintenanceprocedures which are now being developed in CIL. Some of the new open-pitmines presently under construction will have ultimate capacities of 5-10million tpy (para. 4.17) as in the case of Dudhichua (para. 5.06) and largerequipment is already being introduced in some of these mines.

2.15 Coal is transported primarily by rail (70%) followed by roadways(25%) and, to a very limited extent, by coastal barges and ropeways. In1981/82 the average haulage distance for coal was 566 km. About half of thecoal is carried over short to medium distances of up to 500 km since many

industrial consumers, most steel plants and a large number of power houses arelocated in the eastern area, near to the major coalfields. One third istransported to consumers located 500-1,000 km from the mines and the remainderover 1,000 km to consumers in northern, western, and southern India. Thesedistant consumers are located in four main geographical areas. One is a groupof northern states around Delhi, i.e., Punjab, Haryana and northern UttarPradesh. A second is the emerging industrial belt in Gujarat. The third isthe western portion of Maharashtra, including Bombay, and the fourth is thesouthern tip of India in Tamil Nadu especially along the eastern sea coast.

2.16 The performance of Indian Railways (IR) in carrying coal and otherbulk goods deteriorated sharply from 1976/77 to 1980/81 when originatingtraffic declined from 239 million tons to 220 million tons. An account of theoperational difficulties which contributed to this declining performancetogether with the efforts of GOI and IR and assistance from the Bank toovercome them is provided in Annex 2-5. While the measures taken to improveIR's performance are espected to result in future improvements in coalhaulage, no systematic analysis has been undertaken which would indicate howwell the railways will be able to deal with the anticipated coal haulagerequirements by the end of the decade. Recognizing the major difficultiesfacing the railways, there is an urgent need for an overall system study ofhow the railway system can be best utilized for carrying coal in view of theimportance of coal transportation for coal consumption by consumers innorthern and western India. Such a study would (a) define improvements insystems for handling and transporting coal including fixed loading andunloading facilities, wagon design and wagon utilization; (b) establish anoptimal investment program based on reviews of investment priorities andpayoffs; and (c) identify what alternative modes of transportation will benecessary to make up any shortfall in railway carrying capacity for coal. GOIhas agreed to initiate the necessary studies, before April 30, 1984 afterexchanging views with the Bank on the terms of reference. These studies areexpected to be completed in December 1985, and the Bank will be given anopportunity to comment on the results prior to the implementation of therecommendations.

III. THE MARKET FOR INDIAN COAL

A. Indian Coal Supply/Demand Situation and Prospects

3.01 India is the world's seventh largest producer and fifth largestconsumer in terms of tonnages of hard coal. However, India's participation inthe international trade has been minor. It has occasionally exported smallquantities of thermal coal (0.1-0.7 million tpy) to neighboring countries andmore recently, has become a minor importer of coking coal (1.0-1.5 milliontpy). In both cases, India's contribution is less than 1% of world trade.For the future, similar levels of coking coal imports are expected to berequired because steel production growth is expected to stay ahead of newcoking coal mine development (para. 3.11). With regard to thermal coal, giventhat there will be little surplus coal production compared with domesticrequirements in the next five to ten years (para. 3.11) and that coaltransportation infrastructure is highly constrained (Annex 2-5) it is unlikelythat India will develop significant coal exports. Even with a concerted

effort, India's exports might not be expected to exceed 2 to 3% of productionwithin the next decade. For reference, an introduction to the world coal

market and future supply, demand and price trends is given in Annex 3-1.

1. Coal supply

3.02 Coal production in India has increased from 56 million tons in

1960/61 to about 130 million tons in 1982/83 an average annual growth rate of4.0%. Thermal coals comprise 77% of production, up from 71% in 1960/61 asshown below:

India - Annual Coal Production 1960/61 to 1982/83(million tons)

Fiscal Year Thermal Coal Coking Coal Total

1960/61 39.69 15.98 55.671965/66 50.77 16.96 67.731970/71 55.13 17.82 72.95

1976/77 77.39 23.65 101.041977/78 77.66 23.31 100.97

1978/79 79.43 22.52 101.95

1979/80 80.45 23.50 103.951980/81 89.60 24.41 114.011981/82 98.44 26.47 124.911982/83 100.21 30.40 130.61

Source: DOC.

3.03 Coal production takes place predominantly in the Bihar/West Bengalcoalbelt (Map 17252). However, coal production is increasing in other states,

and Madhya Pradesh has recently overtaken West Bengal as the second largestcoal producing state as shown below:

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India - Coal Production by State 1971/72 to 1982/83(million tons)

Fiscal Year 71/72 % 77/78 % 82/83 _

Bihar 32.6 45 42.1 42 54.1 42West Bengal 17.3 24 23.0 23 19.0 15

Subtotal 49.9 69 65.1 65 73.2 57

Madhya Pradesh n.a. n.a. 20.3 20 30.7 24Andhra Pradesh n.a. n.a. 8.0 8 12.3 9Maharashtra n.a. n.a. 3.8 4 7.8 6Orissa n.a. n.a. 2.2 2 3.5 3Uttar Pradesh n.a. n.a. 0.9 1 2.4 2Assam n.a. n.a. 0.6 1 0.7 1Subtotal 22.5 31 35.8 36 57.4 45

Grand Total 72.4 100 100.9 101 a/ 130.6 102 a/

a/ Does not add to 100 due to rounding.

Source: DOC and CIL.

3.04 Since its inception in 1975, the CIL group has accounted for about90% of Indian coal production, the balance coming from SCL (which producesonly thermal coal) and TISCO/IISCO (which produce only coking coal). SCL withnew operations in Andhra Pradesh has grown most rapidly while production hasincreased only slightly at TISCO/IISCO which operate old, deep mines in theJharia coalfield.

India - Coal Production by Company, 1975/76 to 1982/83(million tons)

Annual AverageGrowth Rate (x)

Fiscal Year 75/76 80/81 81/82 82/83 75/76 to 82/83

CIL 88.99 100.95 109.60 114.81 3.7SCL 7.34 10.10 12.74 12.34 7.7TISCO/IISCO 3.34 2.95 2.57 3.46 0.1Total 99.67 114.00 124.91 130.61 3.9

Source: DOC

3.05 The bulk of Indian coals are relatively poor quality by internationalstandards with an average useful heating value of about 4,000 kcal/kg forthermal coal and an average ash content of about 29% for run-of-mine cokingcoal. Grade definition and CIL's planned production by grade for 1982/83 isshown in Annex 3-2.

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3.06 The Sixth Plan (1980/81 to 1984/85) originally included a targetproduction of 165 million tons for 1984/85, (representing an average annualgrowth of 7.7% from the production level of 1980/81). However, based on theproduction trends to date, a target of 153 million tons is considered a morerealistic assumption. A set of longer-term supply projections to the end ofthe Seventh Plan have recently been prepared by the Central Mine Planning andDesign Institute (CMPDI), the engineering and planning subsidary of CIL (seepara. 4.04). These projections indicate a total coal production of 232million tons by 1989/90, including 200 million tons from CIL. Although thisestimate already incorporates a cut-back of about 15% from previous figures,it still appears optimistic. An examination of the status of formulation andimplementation of CIL's projects indicates that in some cases the productionbuild-up of some of the new open pit mines is optimistic. Given the earlystages of preparation in particular for six projects to be included in theplan, a production of about 193 million tons by 1989/90 is considered a morerealistic production projection for CIL. This translates in a supplyprojection of 224 million tons for all India, as shown below:

India - Coal Supply Projection 1984/85 and 1989/90(million tons)

Annual AverageGrowth Rate (%)

89/90 82/83 to 89/90Fiscal Year 82/83 84/85 CMPDI Revised CMPDI Revised

CIL 114.8 132.0 200.0 193.0 8.3 7.7SCL 12.3 16.0 26.0 26.0 11.3 11.3TISCO/IISCO 3.5 5.0 5.8 5.0 7.5 5.2

130.6 153.0 231.8 224.0 8.6 8.0

Coking Coal 30.4 31.0 48.2 42.4 6.8 4.9Thermal Coal 100.2 122.0 183.6 181.6 9.0 8.9

130.6 153.0 231.8 224.0 8.6 8.0

2. Coal Demand

3.07 The most important consuming sector is the power sector whichaccounted for 34% of coal consumption in 1981/82 up from 23% in 1974/75. Thisincludes not only state and central government-owned power houses but alsonon-utility captive power houses for major industrial consumers (such as steelmills and aluminum plants) which accounted for about 3 million tons (7% ofpower sector) coal consumption. Other important consuming sectors are steel(for coking coal) whose share of consumption has remained constant at 21%, andother miscellaneous industries and small users whose share has declined from35% in 1974/75 to 26% in 1981/82 as shown below:

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India - Coal Consumption by Sector(million tons)

Annual AverageFiscal Year 74/75 % 81/82 % Growth Rate (%)

Steel 18.5 21.2 26.5 21.7 5.3Power 20.0 23.0 41.5 34.0 11.0Railways 13.3 15.3 12.5 10.3 (0.9)Cement 3.7 4.2 6.0 4.9 7.1Fertilizer 1.5 1.7 4.0 3.3 15.0Other a/ 30.1 34.6 31.5 25.8 0.7

Total Coal 87.1 100.0 122.0 100.0 4.9

a/ Includes brick, paper, textile and other industries, households, collieryconsumption and exports.

3.08 About 40% of thermal coal production consists of better quality coals(grades A, B and C) 1/ which are supplied on a priority basis to the railways(35%), certain older power plants mainly in eastern India (20%), cement kilns(15%) and selected small industrial users and fertilizer plants (30%). Thebulk (about 55%) of the lower grade thermal coal (grades D-G) is supplied tothe power sector and the remainder to miscellaneous industries and certainfertilizer plants.

3.09 Unlike production, where 58% is concentrated in Bihar and WestBengal, coal consumption is more widely spread throughout India as shown in

the table below:

India - Coal Consumption by Region, 1981/82

million tons %

Northern StatesDelhi, Punjab, Rajasthan, Uttar Pradesh 23.0 19

Eastern StatesBihar, West Bengal, Assam, 67.0 55Madhya Pradesh, Orissa

Western StatesGujarat, Maharashtra, Rajasthan 19.0 16

Southern StatesTamil Nadu, Andhra Pradesh, Karnataka 13.0 11

122.0 101 a!

a/ Does not add to 100 due to rounding

1/ For a definition of various coal grades see Annex 3-2.

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Consumption in the northern states is provided largely from mines in the Biharand West Bengal with most transportation by rail. Consumers in Maharashtraand Gujarat are supplied as much as possible from mines in Maharashtra andsouth western Madhya Pradesh with balancing supplies being provided from minesin eastern Madhya Pradesh, including the Singrauli coalfield. Consumers inthe southern states receive their coal from SCL and from the CIL coalfields inWest Bengal by coastal shipping through the port of Haldia at Calcutta.

3.10 Based on recent trends in the power and steel sectors, the coaldemand projection for the end of the Sixth Plan (1984/85) has been assessed at153-158 million tons, a reduction by 10-15 million tons from the originaltarget in the Sixth Plan of 168 million tons. By 1984/85, therefore, thermalcoal supply and demand are expected to be broadly in balance although someshortages may occur. But 1.0-2.0 million tpy coking coal imports are likelyto be required. With regard to longer term projections, CMPDI 's most recentcoal demand projections indicate a demand of 232 million tons for 1989/90,i.e. by the end of the Seventh Plan. CMPDI's projections for 1989/90 by mainconsumption sectors are shown below:

India - Coal Demand Projection 1989/90(million tons)

Annual AverageFiscal Year 81/82 89/90 Growth Rate (x)

Steel 26.5 48.2 7.8Power 41.5 107.4 12.6Railways 12.5 9.8 (3.0)Cement 6.0 11.5 8.5Fertilizer 4.0 8.5 9.9Other 31.5 46.4 5.0

Total Demand 122.0 231.8 8.4

Source: CMPDI.

A further breakdown of projected coal demand in 1989/90 by sector and byproducer is given in Annex 3-3.

3.11 The CMPDI estimates are based on latest information regarding thedevelopment plans of the various consuming sectors for the Seventh Planperiod. These are based on an underlying GDP growth rate of 5-5.5% per year.The compatibility of these estimates with projections for the rest of theeconomy has not been closely checked and it is to be expected that they willbe modified as the preparation of the Seventh Plan progresses. Fuller detailsof the specific assumptions for each sector are provided in Annex 3-4. Whilethe CMPDI demand projections do not seem unreasonable, they may be somewhatover optimistic given the substantial expansion called for in the variousconsuming sectors. Past experience with previous coal sector projectionsindicates a tendency to overestimate future supply and demand. The relativelyhigh growth rates projected by CMPDI may also be an indication of a continuedtendency towards over-estimation. While there is insufficient information onwhich to make a specific adjustment, future demand estimates could well beoverestimated by anywhere from 5 to 15 million tons in 1989/90. Given thatthe preparation of the Seventh Plan is still in a preliminary stage