Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 4714-IN

Public Disclosure Authorized STAFF APPRAISAL REPORT

INDIA

DUDHICHUA COAL PROJECT Public Disclosure Authorized

February 28, 1984 Public Disclosure Authorized

Industry Department

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

Rs 1.00 = Paise 100 US$1.00 = Rs 9.75 Rs 1.00 US$0.103 Rs 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 kilocalories 1 cubic meter (m 3 ) = 1.308 cubic yards

1 gigawatt hour (GWh) - 1,000,000 kilowatthours 1 kilocalorie (kcal) = 3.97 British thermal units 1 kilocalorie per kilogram = 1.805 British thermal units per (kcal/kg) pound 1 kilogram (kg) = 2.205 pounds 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts 1 ton = 1,000 kilograms

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

BCCL - Bharat Coking Coal Ltd. BICP - Bureau of Industrial Costs and Prices BPE - Bureau of Public Enterprises CCL - Central Coalfields Ltd. CEA - Central Electricity Authority CIL - Coal India Ltd. CMO - Central Marketing Organization of CITL CMPDI - Central Mine Planning and Design Institute DOC - Department of Coal ECL - Eastern Coalfields Ltd. GOI - Government of India GSI - Geological Survey of India ICB - International Competitive Bidding IISCO - Indian Iron and Steel Company IR - Indian Railways MEC - Mineral Exploration Corporation MP - Madhya Pradesh NEC - North Eastern Coalfields NHPC - National Hydro Power Corporation NTPC - National Thermal Power Corporation OMS - Output per Manshift ONGC - Oil and Natural Gas Commission PLC - Planning Commission SCL - Singareni Collieries Ltd. SLC - Standing Linkage Commnittee SEB - State Electricity Board TISCO - Tata Iron and Steel Company UP - - 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 ...... 1 B. Energy Sector Strategy ...... 3 C. The Coal Sector ...... 3

1. Background ...... 3 2. Reserves ...... 4 3. Coal Production and Transportation ...... 6

III. THE MARKETFOR INDIAN COAL ...... 7

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

1. Coal Supply ...... 8 2. Coal Demand ...... 10

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

1. Supply Allocation ...... 13 2. Marketing ...... 14

C. Pricing ...... 14

1. Prices and Pricing Policy ...... 14 2. A Rational Approach to Coal Pricing Policy for Indian Coals ...... 17

IV. THE BENEFICIARIES ...... 19

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

1. Organization and Management ...... 19 2. Operations ...... 21 3. Financial Position ...... 23 4. Development Strategy and Investment Plan ...... 24

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

This report was prepared by Messrs. J. Barrientos, B. Stenberg, J. Strongman and 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 of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii. -

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 - 112l -

ANNEXES

2-1 Primary Energy Production, Trade and Consumption 2-2 Energy Consumption by Sector 2-3 Findings and Recommendations of the Working Group on Energy Policy 2-4 Note on Indian Power Sector 2-5 Note on Indian Railways 3-1 World Coal Market 3-2 CIL - Planned Coal Production by Grade, FY1982 3-3 Coal Demand by Producer, FY1989 3-4 Assumptions Used in Coal Demand Projections 3-5 Coal Price Schedule 3-6 Sales Taxes and Levies on Coal 4-1 CIL Corporate Organization 4-2 Activities and Financial Performance of CIL Subsidiaries 4-3 Scope of Work for Study on Budgetary Systems 4-4 Scope of Work for Technical Assistance on Operational Practices in Open Pit lines 4-5 CIL Financial Statements 4-6 CIL Investment Plan 4-7 CCL Corporate Organization 5-1 Railways Capacity of Selected Routes 5-2 Terms of Reference for Project Implementation Manual 6-1 Equipment Cost Estimate 6-2 Bank-Financed Goods 6-3 Procurement Schedule for Bank-Financed Goods 6-4 Disbursement Schedule for Bank Loan 7-1 Assumptions Used in the Financial Projections 7-2 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 Calculations 8-1 Economic Rate of Return - Cost and Benefit Streams

MAPS

IBRD 17252 Principal Coalfields in India IBRD 25057 Singrauli Coalfields IBRD 25055 Dudhichua - Project Area - iv -

DOCUMENTSAVAILABLE IN THE PROJECT FILE

Operational Statistics 1974-75/1979-80,Coal India Ltd. Annual Reports and Accounts, Coal India Ltd. 1975-76 to 1981-82 Annual Sales and Marketing Review, Coal India Ltd. 1981-1982 Feasibility Report for Dudhichua Coal Project, CMPDI, Ranchi, August 1982 Annual Reports, Department of Coal 1979-80 to 1981-82 Coal and Coal India, Training and Management Development Wing, Coal India Ltd. Appraisal Report on Coal India Project Management, Fluor Engineers, March 1983 Theory and Pricing for Public Sector Undertakings, A. Ghosh, Sept. 1982 Singrauli Coalfields, The Future Energy Capital, Central Coalfields Ltd., July 1982 Review and Assessment of Coal India Planned Investment Program, British Mining Consultants, March 1983 Singrauli Coalfields, A Profile of Program and Future Prospects, Central Coalfields Ltd., October 1980 Project Monitoring Report, Quarter ending September 1982, Central Coalfields Ltd. I. INTRODUCTION

1.01 The Government of India (GOI) has requested a Bank loan to help finance the cost of the initial development of the Dudhichua open pit coal mine located in Singrauli, at the state border between Madhya Pradesh and Uttar Pradesh (Map IBRD 17252). The Dudhichua mine will have a final capacity of 10 million tons per year (tpy) which is to be developed in two phases, the first 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) a wholly-owned subsidiary of Coal India Ltd. (CIL), a Government undertaking. The Dudhichua mine forms part of GOI's plan to increase the utilization of indigenous energy resources. In order to meet coal demand for power generation, the Government has chosen the strategy of basing the expansion of coal 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. The proposed Bank loan of US$151 million would cover about 40% of the financing requirements. The balance of US$222 million will be provided from internally generated funds of CIL and from Government resources.

1.03 The proposed project was submitted by GOI for the Bank's consideration in July 1982, and a pre-appraisal mission visited India in September/October 1982. It was appraised in March 1983 by a mission comprising 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 coal resources 1/ are estimated at over 112 billion tons equivalent to about 61 billion tons of oil equivalent (toe). Of these resources, about half (30 billion toe) are considered to be technically and economically recoverable reserves given present conditions. By comparison, India's prognostic recoverable hydrocarbon reserves were recently estimated at 6.5 billion toe. Based on its abundant coal reserves, the Indian economy has developed over time with coal as the main energy source. In 1981/82, India produced 125 million tons of coal and 6 million tons of lignite which accounted for 54% and 1% respectively of commercial energy supply. Hyoroelectric and nuclear power generation 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 of imported oil represented a major burden for the balance of payments, amounting to 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 1,200 metres. India - Commercial Energy Supply (million tons of oil equivalent) a/

Average Annual Growth 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 4.6 Petroleum 7.9 19.0 34.7 38.4 9.2 6.2 Hydro & Nuclear Power 1.9 6.6 11.9 13.7 b/ 13.2 6.1 Total 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 tons of refined petroleum products; 1,235 cubic meters of natural gas; 4,166 kWh of hydro and nuclear power. b/ Estimated.

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

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

Average Annual Growth Rate (%) Fiscal Year 60/61 70/71 80/81 b/ 1960-70 1970-80

Households 14.9 13.7 11.2 4.6 4.8 Agriculture 1.9 3.4 6.3 11.8 11.2 Industry 43.4 48.9 55.5 6.7 5.8 Transportation 36.9 29.8 23.4 3.2 2.0 Other 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 these consumption trends; electricity consumption is included but on a delivered basis to consumers. b/ Provisional.

Source: Working Group on Energy Policy; Ministry of Petroleum, Chemicals and Fertilizers; and Department of Coal. -3-

B. Energy Sector Strategy

2.03 GOI's energy policy has been based on the principle of maximizing the development of indigenous resources and also, more recently, on encouraging improved efficiency of energy utilization. A comprehensive study on India's future energy supply and demand prospects undertaken by the Working Group on Energy Policy (WGEP) was published in 1979. The findings and recommendations of the WGEP are given in Annex 2-3. In line with this policy, GOI is emphasizing the development of coal and of power generation utilizing coal or hydro resources, and has substantially increased the investment in these sectors in recent years. Preliminary figures call for coal production to increase to 232 million tpy by the end of the Seventh Plan representing an annual growth rate of 8.0% and for electric power generating capacity to more than double to 74,000 MW with 59% of the incremental capacity by coal-fired units, 39% by hydro and 2% by nuclear. Based on GOI's estimates coal will continue to be the most important energy source in India in the future and its contribution to the country's energy requirements will remain at about 50% over the next decade. GOI is also making a concerted effort to accelerate oil and gas development both through national oil companies and by foreign oil companies who have been invited to submit bids for exploration and production sharing on many blocks both offshore and onshore. However, despite these advances, India will remain dependent on imported oil to meet a significant part of its primary energy requirements, in particular, for the growing demand in transport.

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

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

C. The Coal Sector

1. Background

2.06 The coal industry in India originally developed with a large number of small, independent mines. In 1956, some of the producers were taken over and consolidated into one larger government-owned company (the National Coal Development Corporation). Subsequently, in the early 1970s almost the entire industry was nationalized and in 1975 the Coal India Ltd (CIL) group of companies was formed which accounted for 88% of India's coal production in 1982/83. In addition to CIL there are three other coal producers and one lignite producer. The other coal producers are Singareni Collieries Ltd. (SCL), with 10% of total coal production, which is owned by GOI and the State - 4 -

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

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

2.08 The Bank has made one loan for a coking coal project to the Indian Iron and Steel Company in 1961 for US$35 million (Loan 290-P-IN). Activity in the sector resumed with a Sector mission in 1980, following which the India Coal Sector Report, Report 3601-IN, September 1982 was issued. That report provided a basic introduction to the sector and addressed various issues regarding coal exploration, production, investment, transportation, consumption and pricing which were considered important to the future development of the sector. In particular the report proposed a number of recommendations designed to (i) improve the efficiency of existing coal exploration and mining operations; (ii) reduce transportation bottlenecks for coal; (iii) improve project implementation capabilities and maximize production growth; and (iv) establish the industry on a sound financial basis through economic pricing policies and appropriate financing and resource mobilization strategies. Subsequently, the GOI accepted many of the recommendations and has taken steps to implement them as well as requesting Bank assistance in financing certain projects in the sector. The proposed project would support further improvements in the sector, first, by providing financing to the sector and, second, by supporting a number of important actions or studies on which subsequent action will be taken, regarding coal transportation (para. 2.16), supply/demand and linkages (para. 3.13), pricing and 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 separately on a later timetable.

2. Reserves

2.09 India's coal reserves 1/ are estimated at 86 billion tonnes of which 78% 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 600 metres. -5 -

India - Coal Reserves (million tons)

Proved Indicated Inferred Total

Coking Coal 9,597 7,263 1,891 18,751 Thermal Coal 15,096 29,498 22,233 66,827

Total 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 Survey of India (GSI) which is responsible for regional prospecting/reserves assessment. Detailed exploration including proving up reserves for mine feasibility work is undertaken by the government-owned Mineral Exploration Corporation (MEC) and by the Central Mine Planning and Design Institute (CMPDI), a subsidiary of CIL. India's coal reserves are found mainly in the eastern part of the country (MAP 17252) where extensive exploration has taken place in the past. More recently, the rapid growth of demand by consumers in western India, especially in the Bombay area and in Gujarat, has generated a need for new coal developments in central India. In order to meet this need, priorities have been adjusted to emphasize coal exploration in Maharashtra and western Madhya Pradesh. This is a sound approach. As new deposits are identified and subsequently developed in these areas over the next decade, this strategy is expected to be successful in making coal supplies more readily available without the long transportation linkage from the distant eastern coalfields.

2.11 Much of the known reserves in eastern India are located in deep deposits in Bihar and West Bengal which result in difficult mining conditions. A priority has also been given to identifying large coalfields with shallow deposits which can be developed with large scale open-pit mining technologies. This is a sound strategy which has resulted in several such deposits being identified in recent years. The largest of these are the Karanpura and Singrauli coalfields with estimated coal resources of 15 and 10 billion tons respectively. Other important areas are the Obra coalfield (4 billion tons), the Wardha valley (4 billion tons) and the Ib valley (2 billion tons). So far, of these various areas only the first three have been developed. 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 ash content varying from 18% to over 35%. The bulk of the thermal coal reserves are in the 3,500-4,500 kcal/kg range of useful calorific value, the bulk of coking coal reserves in the 26% to 32% range of ash content. To date, the coking coal reserves have been relatively more extensively explored and developed than the thermal reserves, and as a result, coking coal reserves account for about 39% of proven total coal reserves. Reserves of high quality thermal and coking coals are limited and both are in short supply. Most thermal coals require certain preparation before use, which generally takes

1/ Useful calorific value is derived from the gross calorific value after allowing penalties for ash and moisture content. -6 -

the form of separation of shale and rock from the coal by hand picking and some screening of material. About 90% of the coking coal needs to be washed in order to reduce the ash content to more acceptable ranges for feed to the steel 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 in the coal sector in India in December 1982 was about 723,000 employees of which about 50% were in clerical or unskilled manual grades. The degree of mechanization in Indian underground mines is low compared to the major underground coal producing countries in the world. About 96% of underground coal mining in India is by manual methods and only 4% by mechanized operations. All of the mechanized underground mining has been introduced by CIL since its formation and is still under implementation and has not reached full production. Output per manshift (OMS) averages 0.55 tons in underground mines compared with 1.5-3.0 tons in the deep older mines in Europe and 8-12 tons in the new, shallower, highly mechanized underground mines in Australia, South Africa and North America. Given the relative shortage of capital and surplus of labor in the Indian economy, it is not economically justified for Indian underground mines to try and reach a similar degree of mechanization as the capital intensive mines in industrialized countries since the relative values of capital and labor are different. The Indian industry is nevertheless targeting a 10-20% improvement in average underground OMS by the end of the decade. This is considered appropriate and achievable based on relatively simple measures to increase mechanization of coal extraction, handling and loading and on improved training of the work force and upgrading of 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, Indian equipment (35-85 ton trucks, 4-10 m3 shovels and 10 m3 bucket/50 m boom draglines) are presently somewhat smaller than can be found in large open-pit coal mines worldwide (120-200 ton trucks, 15-20 m3 shovel and 30-40 m3 bucket/90-120m boom draglines). The Indian coal industry is progressively moving towards larger mines and equipment. This is a desirable policy since larger operations offer economies of scale and lower unit production costs. Progress has been cautious since the use of very large equipment brings with it an inherent risk that the breakdown of a single piece of equipment will cause a much greater production loss than the failure of a small item of equipment. The move to larger equipment has also been impeded by a lack of foreign exchange since the largest equipment must, for the most part, be imported. Further, in the case of dump trucks, moving to sizes above 120 tons capacity involves a shift in technology from mechanical to electrical drive and, therefore, requires the acquisition of new skills and maintenance procedures which are now being developed in CIL. Some of the new open-pit mines presently under construction will have ultimate capacities of 5-10 million tpy (para. 4.17) as in the case of Dudhichua (para. 5.06) and larger equipment 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. In 1981/82 the average haulage distance for coal was 566 km. About half of the coal 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 are located in the eastern area, near to the major coalfields. One third is transported to consumers located 500-1,000 km from the mines and the remainder over 1,000 km to consumers in northern, western, and southern India. These distant consumers are located in four main geographical areas. One is a group of northern states around Delhi, i.e., Punjab, Haryana and northern Uttar Pradesh. A second is the emerging industrial belt in Gujarat. The third is the western portion of Maharashtra, including Bombay, and the fourth is the southern tip of India in Tamil Nadu especially along the eastern sea coast.

2.16 The performance of Indian Railways (IR) in carrying coal and other bulk goods deteriorated sharply from 1976/77 to 1980/81 when originating traffic declined from 239 million tons to 220 million tons. An account of the operational difficulties which contributed to this declining performance together with the efforts of GOI and IR and assistance from the Bank to overcome them is provided in Annex 2-5. While the measures taken to improve IR's performance are espected to result in future improvements in coal haulage, no systematic analysis has been undertaken which would indicate how well the railways will be able to deal with the anticipated coal haulage requirements by the end of the decade. Recognizing the major difficulties facing the railways, there is an urgent need for an overall system study of how the railway system can be best utilized for carrying coal in view of the importance of coal transportation for coal consumption by consumers in northern and western India. Such a study would (a) define improvements in systems for handling and transporting coal including fixed loading and unloading facilities, wagon design and wagon utilization; (b) establish an optimal investment program based on reviews of investment priorities and payoffs; and (c) identify what alternative modes of transportation will be necessary to make up any shortfall in railway carrying capacity for coal. GOI has agreed to initiate the necessary studies, before April 30, 1984 after exchanging views with the Bank on the terms of reference. These studies are expected to be completed in December 1985, and the Bank will be given an opportunity to comment on the results prior to the implementation of the recommendations.

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 largest consumer in terms of tonnages of hard coal. However, India's participation in the international trade has been minor. It has occasionally exported small quantities of thermal coal (0.1-0.7 million tpy) to neighboring countries and more recently, has become a minor importer of coking coal (1.0-1.5 million tpy). 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 be required because steel production growth is expected to stay ahead of new coking coal mine development (para. 3.11). With regard to thermal coal, given that there will be little surplus coal production compared with domestic requirements in the next five to ten years (para. 3.11) and that coal transportation infrastructure is highly constrained (Annex 2-5) it is unlikely that India will develop significant coal exports. Even with a concerted effort, India's exports might not be expected to exceed 2 to 3% of production within 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 of 4.0%. Thermal coals comprise 77% of production, up from 71% in 1960/61 as shown 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 55.67 1965/66 50.77 16.96 67.73 1970/71 55.13 17.82 72.95

1976/77 77.39 23.65 101.04 1977/78 77.66 23.31 100.97 1978/79 79.43 22.52 101.95

1979/80 80.45 23.50 103.95 1980/81 89.60 24.41 114.01 1981/82 98.44 26.47 124.91 1982/83 100.21 30.40 130.61

Source: DOC.

3.03 Coal production takes place predominantly in the Bihar/West Bengal coalbelt (Map 17252). However, coal production is increasing in other states, and Madhya Pradesh has recently overtaken West Bengal as the second largest coal producing state as shown below: - 9 -

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 42 West 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 24 Andhra Pradesh n.a. n.a. 8.0 8 12.3 9 Maharashtra n.a. n.a. 3.8 4 7.8 6 Orissa n.a. n.a. 2.2 2 3.5 3 Uttar Pradesh n.a. n.a. 0.9 1 2.4 2 Assam n.a. n.a. 0.6 1 0.7 1 Subtotal 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 about 90% of Indian coal production, the balance coming from SCL (which produces only thermal coal) and TISCO/IISCO (which produce only coking coal). SCL with new operations in Andhra Pradesh has grown most rapidly while production has increased only slightly at TISCO/IISCO which operate old, deep mines in the Jharia coalfield.

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

Annual Average Growth 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 3.7 SCL 7.34 10.10 12.74 12.34 7.7 TISCO/IISCO 3.34 2.95 2.57 3.46 0.1 Total 99.67 114.00 124.91 130.61 3.9

Source: DOC

3.05 The bulk of Indian coals are relatively poor quality by international standards with an average useful heating value of about 4,000 kcal/kg for thermal coal and an average ash content of about 29% for run-of-mine coking coal. Grade definition and CIL's planned production by grade for 1982/83 is shown in Annex 3-2. - 10 -

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

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

Annual Average Growth Rate (%) 89/90 82/83 to 89/90 Fiscal Year 82/83 84/85 CMPDI Revised CMPDI Revised

CIL 114.8 132.0 200.0 193.0 8.3 7.7 SCL 12.3 16.0 26.0 26.0 11.3 11.3 TISCO/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 4.9 Thermal 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 which accounted for 34% of coal consumption in 1981/82 up from 23% in 1974/75. This includes not only state and central government-owned power houses but also non-utility captive power houses for major industrial consumers (such as steel mills and aluminum plants) which accounted for about 3 million tons (7% of power sector) coal consumption. Other important consuming sectors are steel (for coking coal) whose share of consumption has remained constant at 21%, and other miscellaneous industries and small users whose share has declined from 35% in 1974/75 to 26% in 1981/82 as shown below: - 11 -

India - Coal Consumption by Sector (million tons)

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

Steel 18.5 21.2 26.5 21.7 5.3 Power 20.0 23.0 41.5 34.0 11.0 Railways 13.3 15.3 12.5 10.3 (0.9) Cement 3.7 4.2 6.0 4.9 7.1 Fertilizer 1.5 1.7 4.0 3.3 15.0 Other 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, colliery consumption 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%). The bulk (about 55%) of the lower grade thermal coal (grades D-G) is supplied to the power sector and the remainder to miscellaneous industries and certain fertilizer plants.

3.09 Unlike production, where 58% is concentrated in Bihar and West Bengal, coal consumption is more widely spread throughout India as shown in the table below:

India - Coal Consumption by Region, 1981/82

million tons %

Northern States Delhi, Punjab, Rajasthan, Uttar Pradesh 23.0 19

Eastern States Bihar, West Bengal, Assam, 67.0 55 Madhya Pradesh, Orissa

Western States Gujarat, Maharashtra, Rajasthan 19.0 16

Southern States Tamil 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. - 12 -

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

3.10 Based on recent trends in the power and steel sectors, the coal demand projection for the end of the Sixth Plan (1984/85) has been assessed at 153-158 million tons, a reduction by 10-15 million tons from the original target in the Sixth Plan of 168 million tons. By 1984/85, therefore, thermal coal supply and demand are expected to be broadly in balance although some shortages may occur. But 1.0-2.0 million tpy coking coal imports are likely to be required. With regard to longer term projections, CMPDI 's most recent coal 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 main consumption sectors are shown below:

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

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

Steel 26.5 48.2 7.8 Power 41.5 107.4 12.6 Railways 12.5 9.8 (3.0) Cement 6.0 11.5 8.5 Fertilizer 4.0 8.5 9.9 Other 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 by producer is given in Annex 3-3.

3.11 The CMPDI estimates are based on latest information regarding the development plans of the various consuming sectors for the Seventh Plan period. 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 the economy has not been closely checked and it is to be expected that they will be modified as the preparation of the Seventh Plan progresses. Fuller details of the specific assumptions for each sector are provided in Annex 3-4. While the CMPDI demand projections do not seem unreasonable, they may be somewhat over optimistic given the substantial expansion called for in the various consuming sectors. Past experience with previous coal sector projections indicates a tendency to overestimate future supply and demand. The relatively high growth rates projected by CMPDI may also be an indication of a continued tendency towards over-estimation. While there is insufficient information on which to make a specific adjustment, future demand estimates could well be overestimated by anywhere from 5 to 15 million tons in 1989/90. Given that the preparation of the Seventh Plan is still in a preliminary stage