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The very fact that 200-250 mt of coal are coming into India as imports to supplement the domestic supply of 650-700 mt is proof enough that there is unmet

demand in the country. In the long term, this demand is expected to grow by around 4 percent per annum up to 2040 or so. In about 15-20 years, coal imports will increase by another 150-200 mt, resulting in total imports of 400 mt. And the present coal mining processes are not likely to plug that demand gap, leading to substantial volumes of imports. Even if Coal India considerably increases its production over the coming years, not all demand can be met from domestic supplies due to logistics problems. Also, there is a requirement of imported coal on quality grounds. For the domestic power plants, it is always better to blend the imported material with domestic coal as this will increase efficiency and longevity of the boilers. Thus, in contrast to popular perceptions, Atanu Mukherjee, President, M N Dastur & Co (P) Ltd, tells Arindam Bandyopadhyay that there is huge demand for coal in the country which domestic supply is not going to meet in the long term.

Excerpts from an interview:

Coal surplus is temporary, shortage

permanent

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Let’s start with the infrastructure sector. The government is spending big money on this sector. The Union Budget for 2017-18 made a record high allocation of `396,000 crore. How do you describe the current slackness in the infra space despite such huge public investments?

There are a couple of things playing out in the infrastructure sector. We all know that the government is planning on spending substantial sums on this sector. The potential spend on infrastructure in India will range between $0.5 trillion and $1 trillion over the next five years. There is an emergent need for spending big on infrastructure growth.

There is great opportunity in the sector, as it is the easiest way to prime growth in a developing economy. But, there are serious challenges too.

A fundamental hurdle in infrastructure sector growth is the prolonged delay in obtaining statutory permit rights, land acquisition, environmental clearances, etc. Another spoilsport is the archaic laws of the land.

Due to these bottlenecks, investments often get stuck and projects get delayed. We need to keep in mind that infrastructure projects are inherently a risky business. There are uncertainties over the availability of labour, materials and resources in time.

Further, the contractors hardly have any control over externalities in the environment. As a result, in India, the average delay in implementation of projects is 3-5 years. Such delays limit the number of projects that actually come into operation.

Secondly, availability of finance is a big challenge. Infrastructure spend cannot be done only by the government. You need to have private source of finance in the economy.

But, India doesn’t have a well-developed debt finance market. The only source of large project finance is the public sector banks, which, again, are carrying the burden of huge non-performing assets (NPAs). So, to boost infrastructure spending, you need to develop a debt finance market. As such, the bond market in India is still underdeveloped.

There have been some initiatives (taken

in the past) to develop this market. There have been talks on promoting private public partnership. But, unfortunately, not much has happened on the ground and the achievements could at best be termed as modest.

As for foreign direct investment (FDI) in infrastructure, you can’t have foreign investors on board unless you have an underlying eco system ready, since risk perception is high in such projects. Participation of the Asian Development Bank (ADB), Japanese Bank for International Cooperation (JBIC) and other developmental banks like Euler Hermes, KFW and Mitsubishi UFJ has been limited at best.

Having said that, I must say the present scenario is better than what it was, say, five years ago. But much more is needed to be done to boost infrastructure. In India, the long-term opportunity is huge, but short-term and mid-term bottlenecks need to be removed first.

How different is the structure and size of the debt market in India vis-à-vis developed countries?

Global infrastructure spending is estimated at $40-50 trillion over the next 15 years. This translates into $3-4 trillion every year, a massive amount. In comparison, spending by India is pretty modest, more so if you consider the long term growth upside.

As for the structure of the debt market, in most of the developed countries, investments are majorly done through the debt finance route through a variety of debt instruments. In Europe, the EIB, for instance, has many structured debt instruments like the Project Bond Initiative, to provide loan guarantees, credit quality enhancements, debt syndication etc.

Such investments are made through innovative special purpose vehicle (SPV) structures and project-based funds. Separation of project cash flows through project-based financing is very important from a risk identification, separation, containment, collateral and focus perspective; this is not to be mixed up with corporate finance. Earlier in the UK and US, the debt capital markets were very

innovative in terms of how they used credit rating swaps for credit enhancement and funding in project finance. The underlying principle for developing this market is based on the tradability of debt instruments.

Didn’t the seclusion from the debt market save the day for India during the global financial meltdown which followed the sub-prime crisis in the US?

Contrary to popular lore, the sub-prime crisis didn’t happen because – as the saying goes – greedy Wall street bankers using exotic financial instruments upended and created havoc in the markets, sending the economy into the Great Recession. The US has probably the most robust, well-regulated and sophisticated financial markets in the world.

If we go back to the origin of the crisis, we will see that, beginning in 1989-90, the US economy started going through a structural change in the nature of employment, inequality, savings and the duration of recessions. Ongoing globalisation and the pace of technology change made unemployment more endemic and structural over the next two decades. The divide between more educated haves – and less educated have-nots widened and the common American’s savings rate went negative. So, the Clinton administration thought out a way to address this brewing crisis by boosting the housing sector by encouraging home ownership through easy credit. This led to the eventual housing boom where home-owners started using their fast appreciating houses as ATM machines.

The Clinton administration, and later Bush, thus tried to use a quick-fix measure to postpone the underlying crisis which had more to do with longer term and harder solutions like college degree education for all in a changing technology-driven and globalised society. Later, as the housing frenzy heightened, greed – of both creditors and borrowers – made a mockery of the credit rating systems and regulatory oversights and things went horribly wrong. It was not that the financial system wasn’t robust, but the eventual manipulation and mismanagement of the system accelerated and heightened the meltdown.

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India has relatively closed capital markets. Therefore, it could not participate in the global financial system to that degree, and escaped relatively unscathed.

In India, the ‘affordable housing’ segment has recently received infrastructure status. How far will this change of status help the realty industry and, in turn, boost demand for steel and cement?

Under the Affordable Housing scheme, the government has set a goal of building 20 million houses by 2022, which, as a target, looks pretty impressive. Of this, about 100,000 houses have been built in states like Chhattisgarh and Tripura so far. The initial response from the private sector has not been very encouraging and the actual results have been rather modest.

Having said that, I must admit, there are some positives in the scheme. I think there will be some impact on the low cost housing sector in the country as the interest rate would be lower and realtors will gain from the carpet area factor as the effective square footage per house that comes under the scheme will be higher.

At the same time, there are a number of challenges. Any builder taking up a project will have to allot 35 percent of dwelling units to the economically weaker sections, which won’t be very profitable for them.

But the major roadblock will come in the form of high land cost in metro cities. A lot of housing projects will come up in metros where land cost is prohibitive. In fact, in cities like Mumbai and Delhi, land cost comprises 50-85 percent of the total cost of a project. Unless some mechanism

brings down the land cost, such projects may not be feasible in big cities.

As for setting up affordable housing projects outside urban centres, the problem is that people living in an urban milieu do not generally want to shift to the suburbs. The lack of good public infrastructure and urban facilities prove a disincentive for them. Therefore, such projects in the suburbs must be preceded by bringing in good road connectivity and creation of public infrastructure in these fringe areas.

If the project really takes off, it will definitely give a boost to steel and cement demand. Currently, the per capita consumption of steel is around 60 kg and that of cement is 220 kg, which are among the lowest in the world. So there is huge growth potential in these sectors.

Coming to coal, the government has set a target for Coal India to produce 1 billion tons by 2020. Do you think that enough demand for coal is there to justify this massive expansion in output? What would be your recommendations to the government to increase demand for coal in the country?

In contrast to popular perceptions, I believe there is huge demand for coal in the country and that domestic supply is not going to meet demand in the long term.

Currently, domestic supply is around 650-700 mt, and another 200-250 mt are coming in from imports. So, there is enough demand and domestic supply is still falling short.

In the long term, the growth in demand is expected to be around 4 percent per

annum up to 2040 or so. The way we are currently undertaking coal mining, we are not going to meet that demand. Also, if we compare our performance vis-à-vis other major coal producing countries, the areas of concern will become apparent.

There are several yardsticks to measure where we are falling short. For instance, our productivity is pretty low, about 2.5 tons/person year, versus 6-8 mt /person year in China and 13-14 tons/person year in Australia and Canada. Also, our average exploration budget is about $10 per sq km, while that of Australia and Canada is about $120 per sq km. Our projects are mostly opencast and run up to only 100 metres. The share of underground mining is very low and that further drags down our effective productive output. Furthermore, the coal quality is not good and contains a high level of ash. Overall, the share of India’s mining in its GDP is only about 1.5 percent, against 5-7 percent in Australia, South Africa and other natural resource-intensive countries

Given these constraints, it is very difficult to meet the kind of demand that the country will have 20 years down the line. That’s a big challenge. Unless we allow private participation and significantly increase our productivity, we won’t be able to meet that demand.

As we all know, the Ministry of Coal (MoC) has set a production target of 1.5 billion tons by 2020. But I don’t think it is achievable. May be, Coal India (CIL) will end up with a production of 750-800 mt, while others would contribute 250-300 mt, resulting in a total production of around 1.1 billion tons. The current trend shows that demand will exceed that volume by a significant margin.

If you look at the current off-take scenario, it seems the power sector is losing its appetite for coal. What would be your prescription for addressing the woes of the power sector?

There is little doubt that, at the present juncture, there is slackness in coal demand from the power sector. This is a peculiar situation where the plant load factor (PLF) is only 60 percent, even though the generation capacity is still not adequate.

The overstretched discoms would rather shed load than buy power from generators and sell power at a loss and in the process add

further to their debt woes. Paradoxically, the power spot markets today, where power can be bought below the marginal cost, make the situation even worse for the generators as it dilutes incentives for entering into long-term power purchase agreements (PPAs) by

discoms, thus destabilising the generators’ business model. Overall, I think, that is why the power model in its current form is not profitable and this is being reflected in the artificial demand deflation (in coal). As a result, coal is piling up at the plant level and as pithead stocks.

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The primary reason for this paradox is the bottleneck created by the distribution companies (discoms). The discoms continue to bleed and have accumulated huge losses with their operationally inefficient infrastructures and unsustainable debt load, and in the process they have disrupted the entire power chain. The losses are primarily due to the high AT&C losses of about 27 percent - which is about 5 times the losses (5-6 percent) reported in China or the US - thus increasing the average cost of supply to over `5 per unit compared to the average revenues of around `4 per unit.

The overstretched discoms would rather shed load than buy power from generators and sell power at a loss and in the process add further to their debt woes. Paradoxically, the power spot markets today, where power can be bought below the marginal cost, make the situation even worse for the generators as it dilutes incentives for entering into long-term power purchase agreements (PPAs) by discoms, thus destabilising the generators’ business model. Overall, I think, that is why the power model in its current form is not profitable and this is being reflected in the artificial demand deflation (in coal). As a result, coal is piling up at the plant level and as pithead stocks .

Another major bottleneck in the thermal power sector is the poor grid connectivity. The southern India states have demand from industries and can potentially sell industrial power at `7-8 per unit, but the southern grid cannot take power from other regions as grid connectivity is inadequate. Lack of seamless grid connectivity across regions thus causes demand supply mismatches.

In order to address the discoms’ plight, the government had launched UDAY in 2015, but I think, by itself, it’s not enough to deal with the `4,300,000 crore debt piled up by the discoms without stringent, measurable and time-bound restructuring or divestment of operations of the discoms. In simple terms, it’s kind of largely forgiving the debts of the discoms and rolling them over to the states using liquidity from the UDAY bonds, while extracting promises from the discoms to reduce AT&C losses and improve operating efficiencies.

Variants of UDAY, had been attempted before through initiatives like Financial Restructuring Plan (FRP) in 2012, but they failed due to the inability of the state and discoms to comply with AT&C reduction goals. It remains to be seen how feasible it would be to implement the promises by the discoms once the loans are rolled over. Besides, there are no free lunches and someone has to give – and, in this case, the deficits of the already debt-laden states will be stretched further.

Some people suggest raising power tariffs is the solution to improving profitability of the sector. But, Indian power tariffs are not among the lowest in the world. If you compare with the US, the average industrial power tariffs in most of the states in that country are 5-6 cents which come to around `3.5 per unit (gas-based). In comparison, India’s power tariffs are at `4-6 per unit. Adjusted on purchasing power parity basis, this is quite a bit on the higher side. So, again, the solution is more to attack the cost side and operations side of the discoms, including the AT&C costs, on a war footing. If the discoms become operationally stable, the generation costs will also go down as the PLFs go up. For example, if a generator runs at a PLF of 60, the cost per unit comes to around `2.70 compared to a generator running at a PLF of 90 where the cost of generation drops to `1.80 per unit. This increasing demand-supply stability feeds on itself to lower the costs of electricity to the minimum. Artificially tinkering with tariffs is really not the solution at this stage.

It is also true that a fair portion of the problem of the power sector’s cost of generation can be attributed to inefficient

production and high input costs. Much of this is aging capacity that has sub-critical operations, lower efficiencies, higher carbon emissions and lower PLFs. The effective cost of coal is high as the quality of the domestic coal supplied is poor. Added to this are the high freight charges.

We need to address the generation aspects with adoption of technology at an accelerated pace. We have a large number of sub-critical units which have an efficiency level of 33 - 35 percent. The newer equipment are better, but super-critical or ultra-super critical plants are very few in number. We need to increase the average plant efficiency level to 40-45 percent.

Another important initiative could be the mandatory washing of coal used in those plants. In this regard, I welcome Coal India’s proposal to join hands with the consuming industries to set up new washery units. Such a move is perfectly reasonable since the consumers will share the risk and rewards too.

Various reports claim that India does not need any new coal-based power generation unit in the coming 10 years. What is your take on this? Do you think renewable energy can replace coal in a big way?

I really don’t know how to react to this over-optimistic view on renewables. While the intention behind promoting renewables is very good, pragmatism calls for caution in extrapolating the future. Let me be honest on this – the power generation capacity of renewables can never match coal, oil or gas anytime in the near future.

This is because there is a huge difference in power density (how much power you can produce per square metre of effective area

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In order to address the discoms’ plight, the government had launched UDAY in 2015, but I think, by itself, it’s not enough to deal with the `4,300,000 crore debt piled up by the discoms without stringent,

measurable and time-bound restructuring or divestment of operations of the discoms. In simple terms, it’s kind of largely forgiving the

debts of the discoms and rolling them over to the states using liquidity from the UDAY bonds, while extracting promises from the

discoms to reduce AT&C losses and improve operating efficiencies.

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used). While coal and nuclear have a power density ranging from 300 – 1,000 watt per square metre of effective area, solar has only 6-10 watt and wind about 3 watt per square metre.

So, if we plan to put up a large solar plant, we will need huge land area. For a 640-MW solar plant, the area roughly needed is about 10x10 sq. km. If we aim to meet the total requirement of power through renewables, the land needed will be beyond the scope of our ability to mobilise the same. Keeping this land constraint in mind, I wonder how the government is going to implement its highly ambitious plan of setting up 100,000 MW solar capacity by 2022. And then, there will also be the issue of obtaining environmental clearances (EC) and all other statutory clearances for these projects .

Apart from this, there is the question of reliability of this power supply. Power plants need to be run 24 hours a day with a steady output – which is also known as baseload. The problem with wind and solar is that both depend on weather conditions. Solar plants run on 50 percent effective capacity, since you can’t run them in the night. Solar also has the problem of intermittency due to cloud cover and rains, which further reduces the effective capacity.

Currently, the wind power capacity in the country is about 30,000 MW, but the effective generation is only 5,000-6,000 MW. For solar, the capacity is about 10,000 MW, while generation is probably about 5,000 MW at best. There is a fundamental scale problem in these resources. Therefore, we will need standby capacity (about the same amount of capacity, like Germany has done) which has to come from conventional power plants. All this will push up the cost of electricity for the consumer .

Furthermore, as there is variability in solar/wind supply, these are not exactly suitable for the grid because if you put variable load in the grid, you will have situations of instability that could induce conditions leading to an eventual grid collapse. The original grid was not designed keeping uncontrolled intermittent power load of renewables in mind. The grid needs to be re-engineered over time and to

preempt such a scenario, you need expensive conditioning equipment, and massive grid scale battery storage.

However, renewable technology will improve in scale and reliability over time and given the way the government is trying to promote renewables, we can assume that solar/wind power will eventually take a share of say about 15 percent in our energy matrix in 15 years’ time.

A more suitable option, in my view, is hydro-electricity. Currently, we have a hydro power capacity of 45,000 MW. This is a stable source of power and can be looked into for further expansion.

The other option, nuclear power, although environmentally friendly and technically sound – is a difficult proposition. This is primarily because of the very high capital costs, long gestation periods and also the opposition and resistance from the local people. Taking into account the capital cost factors, the cost of electricity through this route comes to around `7-8 per unit (about 11 cents) and will thus be relatively uncompetitive in the foreseeable future. The current capacity is about 6,000 MW and I can only see a modest addition of nuclear capacity, if at all, in the near future.

In April-December, 2016, the average PLF of thermal power stations in the country slid to decade’s low of 59.64 percent. How could this trend be arrested?

Like I said, distribution and AT&C losses are the primary bottlenecks in the thermal power sector, leading to overall low PLF.

If you scan utility-wise data, you’ll find that among the state utilities, NTPC has a relatively better PLF of 72-73 percent. This is primarily because NTPC has some presence in distribution as well, through its subsidiary operations.

There is also a substantial capacity based on aging thermal power plants which have low efficiencies. Although, it is not necessary that aging plants have lower PLFs, the general mid-size generators in India of over 25 years run at a PLF of about 65 percent. To increase the PLF and efficiency for many of these plants, we need to focus on replacing this capacity with high-efficiency generators. From sub-critical

technology, we must opt for critical, super-critical and ultra-super critical technology where our entire future generation capacity is concerned. This will ensure better efficiency and high PLF at lower capacity footprints.

In gas-based generation, the problem is a little different. Currently, gas-based generation capacity is about 25,000 MW, while the PLF is only 22 percent. We don’t have much gas reserves in the country. There is not much volume available at KG6 Basin. For the purpose of power generation, the prevailing gas volume levels make combined cycle power plants uncompetitive. Unless gas is available at less than $4-4.5 per million British thermal unit (mmBtu), the economics of gas-based power plants are not compelling. In the US for example, with the shale gas revolution, gas costs about $3 per mmBtu today, and that is why you see a move to gas-based power generation.

The other option is using LNG as feedstock for gas-based power generation. Currently, the landed price of LNG is about $7/mmbtu at Dahej/Kochi. But you need to add the conversion cost of about $ 0.75/unit. Besides, it requires an extensive pipeline network to use LNG as a fuel. Cost of transportation through the pipeline is additional. Altogether, the total landed fuel cost comes to around $8.5 or so per unit.

The government is determined to curb coal imports, especially by the power sector. How far is it feasible given the quality variations? What is your outlook on coal imports by India over the next 5 years?

Stopping coal imports altogether is not feasible. Demand for coal will be significant in the long term. In the short term, there is a bit of slackness due to the distribution problem in the power sector. Besides power, coal is needed for steel-making as well. And coking coal imports will only keep on rising given the expansion of capacity in the steel sector and the lack of reserves in India.

Apart from meeting coal demand through imports, there is also a requirement of imported coal on quality grounds. For the domestic power plants, there are economically feasible ways to blend the

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imported material with domestic coal that will increase efficiency and longevity of the boilers. If a modern plant uses only the high ash domestic coal, it will adversely impact a boiler’s performance.

Even if CIL substantially increases its production over the coming years, not all demand can be met from domestic supply due to logistics problems. Most of the coal mines are situated in the eastern region, while a lot of generation plants are elsewhere (west, north and south). Therefore, coal along with the high ash content has to be transported over 600- 1,000 km, resulting in a higher landed cost after washing, at the point of consumption. For a plant located on the west coast, it is much better to import higher quality coal from South Africa, as the ocean freight cost is only $7-8 per ton. The effective cost per ton accounting for the higher heating value and ocean freight will turn out to be cheaper in the latter case.

My estimate is that in the next 15-20 years, coal imports will increase by another 150-200 mt, resulting in total imports of 400 mt, compared to the current level of around 200-250 mt. In the short term, there will be a falling trend, but that should reverse in the near future. Thus, I feel, coal surplus is a temporary trend while shortage is likely to be a permanent phenomenon.

For M N Dastur, the steel sector has been the main focus area in recent years. What are the factors behind the prolonged slackness in steel demand in India? What is your mid-term outlook for the sector?

First let me talk about some of the issues and the outlook. The steel industry goes through business cycles every 8-10 years.

Currently, there is massive overcapacity globally and China leads the pack with close to 500 million tons of overcapacity. Starting early 2000s, China created a huge capacity in a very short period of time, which has sort of destabilised the equilibrium and kept prices depressed.

Today, the world steel industry has a capacity of around 2.4 billion tons, while production is only 1.6 billion tons, resulting in a capacity utilisation of 68 percent, far less than the average industry utilisation of 85 percent during normal times. A lot of the capacity built up in China, in the Hebei province particularly, is inefficient capacity, wasteful and polluting. I believe that the Chinese government is taking effective measures to shut these down.

Although any future projection is fraught with uncertainty, I think, there is unlikely to be any significant capacity uptick in the next 2-3 years globally. Although, there would be brief flashes of price and demand rallies, it would probably be after 2020 that one could expect to see a semblance of a sustained upturn. But, to make it happen, about 600 mt of existing capacity needs to be knocked down or rationalised.

In India, the domestic steel industry was suffering from cheap imports from China, and the recent measures adopted by the government to curb the menace has ameliorated the situation somewhat. However, trade measures are only temporary fixes and the long-term health of our nation’s steel industry is largely dependent on how we can become the most productive and efficient producer of steel in the world.

Our country also has significant

inefficient capacity in the form of the secondary steel sector and many of the public sector steel units. We need to replace aging and non-scalable plants with new capacity which is more efficient but, more importantly, improve productivity and efficiency of many of the steel plants by improving their operations, quality and energy efficiency levels.

For the Indian steel sector, a major challenge lies in the form of the large inefficient capacity that is owned by secondary producers, coal-based DRI plants and small induction furnaces, which lack scale and have elevated levels of pollution. The secondary steel sector comprises about 50 percent of the total steel-making capacity in the country. Over time, this segment will have to evolve to be competitive and environmentally friendly, through adoption of better technology, processes and scale of operations.

Also, our non-performing loans in the steel sector account for over a third of the total non-performing assets (NPAs) of the banks. Unless the distressed steel assets are quickly and surgically resolved, these will continue to drag down the industry, investments and the industrial credit growth graph of the nation. The PSU banks, which have been saddled with massive NPAs outstanding from the steel companies, cannot do much about it (in terms of loan write-offs etc) unless there is a clear implementable plan, resolve and political will to make it happen.

First of all, there needs to be a mechanism for recognising the amount of write-offs and in the absence of a debt market, these distressed debts need to be

If we plan to put up a large solar plant, we will need huge land area. For a 640-MW solar plant, the area roughly needed is about 10x10 sq. km. If we aim to meet the total requirement of power through renewables,

the land needed will be beyond the scope of our ability to mobilise the same. Keeping this land constraint in mind, I wonder how the

government is going to implement its highly ambitious plan of setting up 100,000 MW solar capacity by 2022. And then, there will also be the issue of obtaining environmental clearances (EC) and all other statutory

clearances for these projects.

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individually priced and restructured. Also, in the absence of a working bankruptcy code, issues of ownership transfer and debt-equity swaps need to be negotiated if the haircuts are to happen. The second problem is that given that most of these debts are concentrated with the State Bank of India (SBI) and the PSU banks, a debt write-off will require a massive recapitalisation of the banks which needs to be worked through the political system. Finally, there is a major disincentive for the PSU bank decision makers to write off large debts for fear of being scrutinised by the Central Vigilance Commission (CVC) and other statutory agencies.

As far as Indian demand goes, the muted growth in infrastructure spend has adversely affected steel demand. Growth in urbanisation (smart cities), public infrastructure and industry has not been commensurate with expectations.

But, undoubtedly, India offers significant opportunities and is probably the only hope for a large growing steel industry in the world for the long term. In fact, over the next 10-15 years, India will emerge as the next big destination for steel production. Steel is a foundational element of an economy and determines the state of capital formation of a nation. At about 1-1.5 tons of stock of steel per capita, India stands in stark contrast to developed countries like the US and Japan, where the number is closer to 12 tons of steel stock per person.

This indicates a very large opportunity and we have the potential to increase our per capita consumption 10 times, ie, from 60 kg to up to 600 kg, during the initial rapid phases of growth.

However, there should be a corresponding ability to build that kind

of capacity and the nation has to have the rapid absorptive capacity in terms of infrastructure, cars, housing and so on. The problem is that we don’t have the mechanisms and institutional structures to build and absorb it at that scale in the near and medium term. Current production capacity in India is about 120 mt. Ceteris paribus, this capacity may go up to 200 mt in the next 10 years.

In view of the scarcity of coking coal in the country, how can the Indian steel mills overcome their fuel challenges?

India will continue to import coking coal at an accelerated rate in the foreseeable future as it continues to increase its share of steel making through the blast-furnace route. There are opportunities to acquire coking coal assets at attractive prices in the international markets and India should monitor, evaluate and exploit these opportunities to its advantage. Additionally, substitution of coke with pulverised coal will reduce the coke budget while improving energy efficiencies. Further, blending coking coals of inferior quality and using technologies for making coke using inferior coals will go a long way in reducing coking coal budgets.

Although, we have limited reserves of good quality coking coal, we probably have huge opportunities to transform large parts of the secondary steel industry by basing these on coal gasification using our large reserves of high-ash, low quality coals. If we build a national gasification infrastructure, we can provide energy-efficient and less polluting gasified coal to not only our steel mills but India’s fertiliser, power and chemical plants. A pioneering project in

coal gasification for steel was done by Jindal Steel & Power at Angul in Odisha, but it is currently not fully functional as the coal mines got de-allocated.

Indian thermal coal is not of good quality but is good enough for gasification. For cheap industrial scale gas, we should certainly explore large gasification projects in a shared merchant scale operation. Underground coal gasification (UCG) and coal gasification require policy impetus which should allow private participation in building the most efficient merchant scale gasification infrastructure. Given the socio-economic impact on the nation, the policy impetus needs to consider exercising discretion through allocation of coal blocks for gasification rather than only auctions to extract the best price. This is a difficult policy choice, given the recent scams and the distrust of discretion means that methods other than auctions could be perceived as favouring particular parties.

However, for coal gasification we need to figure out ways to capture emissions more effectively. Carbon capture and Co2 sequestration technologies will need to be adopted based on most economical cost basis. Till date, implementations of carbon capture and storage (for example using integrated gasification combined cycle technology) have had only limited success, like in Norway and some plants in the US. There are two reasons for this: first, not enough money has been spent on this technology and, second, storage is a problem as this cost is very high.

Money spent on UCG, sequestration and carbon capture can reap rich dividends for India to make “Green coal” a reality for steel and other industries. Rather than investing only in solar and wind, investment in clean coal technologies will enable an environmental-friendly option for a large set of industries, ranging from steel to power, at very effective cost points.

In the steel sector, hardly any big-ticket investment has come up in the last 5 years (apart from the Kalinganagar plant). What are the main reasons behind the poor investment scenario in this sector?

The problem, as I mentioned, lies in overcapacity and tepid demand. Also, the

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Currently, the wind power capacity in the country is about 30,000 MW, but the effective generation is only 5,000-6,000 MW. For solar, the capacity is about 10,000 MW, while generation is

probably about 5,000 MW at best. There is a fundamental scale problem in these resources. Therefore, we will need standby

capacity (about the same amount of capacity, like Germany has done) which has to come from conventional power plants. All this

will push up the cost of electricity for the consumer.

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infrastructure sector did not pick up due to various bottlenecks and this affected the flow of investments in the steel sector.

Secondly, bank credit growth has slowed down in the last few years because of the NPA mess that I dwelt on earlier. Credit growth in PSU banks has dropped from 20-25 percent in 2007-08 to 7-8 percent at present and industrial credit growth has turned negative. Today, one cannot have access to funds even if one wants to expand plant operations. As we know well, the steel sector is highly capital-intensive. Typically, a steel plant requires an investment of `5,000-6,000 crore per ton of steel capacity.

As I said earlier, the problem is that there are huge stressed assets in the steel industry and bank NPAs (against loans given to steel mill projects) run up to `300,000 crore. Unless we solve the NPA issue and stressed debt problem in the steel and power sectors, it is difficult to get bank finance. We need to write off bad loans and recapitalise the banks so that investment may start flowing again.

Dastur had offered consultancy services to Rashtriya Ispat Nigam’s factory at Vizag, which aims to scale up production from the current 6.3 million tons per annum (mtpa) to 11.5 mtpa by 2022. Do you think, by 2022, the Indian steel market will be strong enough to absorb increased supply not only by RINL but from other steel majors as well?

By 2022, we should show an improvement in steel demand. Steel consumption growth is expected to be 5-6 percent during this time. In the coming years, a lot of wasteful capacity is going to be shut down and smaller scale capacities consolidated. So, replacement capacity will also be needed. Therefore, the market will likely be able to absorb new capacity.

The government did not extend the minimum import price (MIP) on steel products in February 2017. What is your view on the discontinuation of the protective measure?

At the World Trade Organisation (WTO), the MIP was considered a contentious issue. The WTO maintained that such

measures are not a long-term solution. Unlike anti-dumping measures, the MIP is a general measure without specifying countries or companies. The MIP needed to be replaced by anti-dumping duties which is more WTO-compliant and that has happened in some cases. But these are all short-term measures. At the end of the day, such protections are not going to solve the problem as they often protect inefficient practices. Instead, we need to make the industry world class and efficient by addressing the fundamental issues around technology, process, operations, raw materials and logistics.

For example, many of the major integrated steel-makers in the country, are very efficient and competitive inside their factory gates. Outside, they are not necessarily so, as higher transport and inputs costs dent their competitiveness. Therefore, making the logistics infrastructure most efficient is an essential national imperative which will help make our steel plants become more competitive.

There are also some intrinsic productivity problems with some of our PSU steel plants which protective measures can only aggravate. SAIL, the public sector steel behemoth, is a case in point. While it is probably a myth that privatisation is the silver bullet for all the productivity and profitability ills that plague our state-owned plants, clearly, organisations that foster visionary leadership, accountability, decision-making, incentives and risk-taking will be far more competitive irrespective of whether they are public or private sector enterprises. POSCO, the once state-owned Korean steel giant, is five times more productive than SAIL and probably has the highest productivity level in steel in the world. It achieved the highest levels of productivity as a state enterprise when General Park led the company from its modest beginnings in 1968.

SAIL has been a pioneer in steel-making in the country but today it has one of the lowest productivity levels among its peers, even though it has got technology, owns mines and has substantial new and highly efficient capacity. SAIL has the potential to have one of the most productive set of plants in India. But it is hobbled by

a state-controlled decision-making system and limited in its autonomy to pursue strategies which are in its best interest. One needs to release controls and overhaul the institutional system, and take up plant-wide restructuring and operational improvements to make it efficient and world class.

Globally, the mining companies’ exploration budgets slumped to a decade-low in 2016. What is the reason behind such a huge drop? When could one expect the mining and exploration sector to rebound?

Investments in explorations were up in 2007-08 during the global commodity boom. All giant mining companies like BHP bought assets and made huge investments (much of it as debt financed capital outlay). The total market cap had increased to close to $2 trillion in 2012 or so.

With the deflation in demand and moderation in Chinese growth, the market saw a downtrend and the market capitalisation dropped to one-third and margins came down to 3-4 percent from a high of 15-20 percent seen during the boom. With the capital flushed out, debt was being exposed and this led to bankruptcy for companies like Peabody and Alpha Natural Resources etc.

In contrast, miners like Vale, BHP and Rio Tinto gained from consolidation during the downturn. Today, these companies have got the best cost structures in the industry with Vale planning major reductions by next year as its massive SD11 project takes off. To survive the lean period, smaller and medium companies went through restructuring. Even now, we see lots of inefficient capacity is being closed down, which is good for the industry.

COvER sTORy

Atanu has been consulting for metals, mining and energy industry globally in areas including strategy, technology, operations and finance. He works at the highest levels with national and international metals and mining firms, the financial institutions as well as with Government of India on industrial strategy, asset restructuring and policy for the core sector. He also advises international private equity firms in energy and related businesses in North America. Atanu holds a joint graduate degree in Engineering and Management from Massachusetts Institute of Technology’s School of Engineering and The MIT Sloan School of Management, Cambridge, MA. He was also a Research Fellow at MIT’s Computer Science & Artificial Intelligence Laboratory.