Mozambique coal for Indian power & steel companies

With domestic coal production under stress, and more coal based power plants being planned, Indian power companies are hunting for coal resources across the world.

Indonesia has been the largest coal exporter for India. Many IPPs (independent power producers) and power utility companies like Tata Power, Adani power, JSW energy, Reliance power, Lanco Infratech are dependent on this import for some of their generating capacity.

The gravity of the situation can be understood from the fact, that Coal India, world’s biggest coal miner, is also out hunting for coal. With the planning commission having decreased capacity addition targets in the 12th five year plan, it is the need of the hour to acquire coal resources abroad.

This is where Mozambique comes in. This east African country came into the picture when many international as well as domestic players showed interest in its coal assets.

Mozambique has huge unexplored coal resources. Coal production in the country has remained low in the range of 15K to 40K tonnes in last 10 years. However with global companies like Vale, Rio Pinto, Riversdale and Coal India investing in the country, we see great prospects in the country's coal fortunes. It is expected that coal production will reach 25MT by 2015 and cross 100 MT when most of the mines commence their operations.

So far, few companies have started coal production activities in the country. In 2012, production will boom, once coal mining in the ‘Moatize’ mine commences.

Facilities to complement mining activities in the country are highly under developed. Railway and port infrastructure needs to be developed to match international standards.

Mozambique has a corporate tax rate of 35% and 3-8% production tax on miners. This is on top of the fact, that expected royalty from mining is low in the country.

The government wishes to increase the share of mining in the GDP from 3 per cent to 6-7 per cent in the near future and has plans for a new legislation. Under the new legislation, the time frame to start coal production will be decreased from 15 years to 2 years. But the tax and royalty structure will remain the same.

Through this legislation, the government wishes to ease the licensing process for mining companies (Source, Reuters Africa).

Coal prices across the world are at an uncomfortable level, and Indian companies are getting hit by this cost increase & other issues like low billing, under recoveries etc.

In our opinion, opportunities in Mozambique can prove fruitful for Indian power, coal and steel companies. As most of these mines are under developed, the government in Mozambique will be dependent on foreign companies for exploratory and development related activities and thus would try to keep taxes and royalty low in order to attract foreign investment,

According to news report, price of coal in Mozambique is likely to remain close to USD 50 per tonne, which is 50 per cent less than the international benchmark prices. We expect coal prices in Mozambique to remain low so as to curb competition from leading coal exporters like Indonesia, South Africa and Australia.

Among Indian companies, Jindal Steel & Power has secured a mining license and will start coal production by 2012. Coal India also expects to start with an annual rate of 5 MT by 2015 and wishes to acquire more resources in the country. Tata steel is also in the process & could start production of about 2 MT per year from 2012.

We at DSIJ believe this to be a good opportunity for the power sector to reduce its coal deficit in the future. As production rises, more projects could be planned. IIPs as well as the UMPPs, also have a good chance to somewhat ease the Indonesian coal import burden. Having said this, hurdles like transportation and limited infrastructure development will need to be tackled in order to gain the maximum benefit.