SECMC (Sindh Engro Coal Mining Company) has filed a tariff petition for expanding its capacity. This is a third expansion. The mine started its phase-I at 3.8 MTPA (Million Tons per Annum) through phase-II at 7.6 MTPA to the current Phase-III expansion at a cumulative capacity of 11.2 MTPA.
We will make a few comments on improving the proposal and approaches for reducing foreign exchange component. The bulk of the production cost appears to be in foreign exchange, which is a larger problem of Pakistan’s local production and even export items.
The production cost has been coming down gradually with plant expansion; it has come down to the proposed 30-year tariff of 37.26 USD/ton.
The incremental CAPEX of the Phase-III is 104.97 USD out of which 68.18 USD is EPC (engineering, procurement and construction) cost, all in USD. One would have expected a marginal FE component. However, diesel cost, which is in foreign exchange, is a whopping 18.8 million USD. We will discuss this later in this space. Similarly, one would have expected lower FE component in over-burden removal (OBR), which is costing 22.91 million USD. Localization of mining activities is a much desirable objective which has multiple advantages.
The main issues appear to be the financing cost and the diesel cost. We will first deal with the diesel cost and then take up the financing cost issues. Diesel cost appears to be one of the significant costs at 6.58 USD per ton coming out to be 15-16 percent of the per ton cost of production. In total annual terms, this would amount to 73.7 million USD per year — all in foreign exchange. We are passing through a foreign exchange crisis.
It is almost a perpetual problem; exports being less than half of the imports and rest expected to be filled by remittances and foreign loans. Not much explanation is required in this respect. SECMC itself is suffering from the lack of foreign exchange to pay off the liabilities of its foreign contractor which has served a notice. SECMC has enough cash but cannot convert it into dollars.
What can be done to do away or at least reduce this heavy out-flow of foreign exchange? The answer is electricalization. Electricalization of mining is being done almost everywhere in the world.
With the introduction of EV, this has become to use EV trucks and shovels. Cheap local Thar electricity is already being produced at site. EV mining trucks of 30 to 400 tons have been developed which work on batteries. Similarly, electrical conveyors may be added as much as possible.
Earlier, one would have spoken about the need of BWE (Bucket Wheel Excavator) but these are diesel operated. One is not aware if electrical BWE has been developed. These may be a bit more expensive. I am not sure. It may add much to operating cost but would save diesel cost in foreign exchange. SECMC and the regulator may like to examine the electricalization issue.
Easier said than done; reportedly, there are tariff and accounting difficulties in using electricity from the partner electricity production project owned by the same share-holders. It is hoped that these issues are reviewed and a reasonable consensus is reached enabling saving of foreign exchange by reducing diesel fuel consumption.
Motivations of similar companies abroad are different: pollution and climate change. Although we share the same values but our urgent issue is saving foreign exchange. It is hoped that both the petitioner and as well as the regulator would consider this issue and at least launch a partial Diesel-to-EV conversion programme.
Financing cost, especially, RoE at 18 percent in USD terms, appears to be high. But it is a contractual matter and has relevance to larger issues of IPP (independent power producer) projects. There is a debate on requesting renegotiations of the financial terms of these projects. However, a rate of 4 percent interest on long-term loan on sovereign guarantees, if quoted correctly, has saved our skin.
Today, LIBOR is at 5.5 percent as opposed to 0.5 percent only a few years back when Nepra (national electric power regulatory authority) was merrily awarding high margin at 4.5 percent. Thus LIBOR-based IPP loans’ effective interest rates have increased to 10 percent per annum, almost double the earlier rate. All of this has necessitated reviewing the financial terms. We have discussed the options elsewhere.
For the phase-III project under consideration in this petition, the debt is being financed in local currency at KIBOR plus 2.5 percent, while KIBOR is being quoted at 21.99 percent. A margin of 2.5 percent is rather high. Usual rates for such established companies are in fraction of a percent. There are extra-ordinary conditions prevailing these days. It is wondered if alternative cheaper financing could be availed.
The benefits of Thar coal became more evident when recently international coal prices tripled reaching 300 USD/ton. Rupee depreciation multiplied the problem. Unfortunately, we have installed three large coal power plants working on imported coal. Cheaper Afghan coal was available and also some local sub-bituminous coal from Balochistan was there which helped reduce the calamity.
The imported coal power plants’ operational capacity came down to almost half. These may have to be closed down but fortunately imported prices came down to USD 125 per ton; still high. Thar coal energy content is about half that of international (Sub-bituminous) coal. Thus a 40 USD/ton local Thar coal price would mean 80 USD/ton in comparable terms.
There is much more potential of Thar coal than is being evident in this particular project. About 20 MTPA of coal is imported for the three imported coal power plants. And industries like cement, glass, tiles and others also use gas or imported coal.
Only cement industry has converted to coal but largely uses imported coal; all of these can be converted to Thar coal. With further improvements and economies and localization, the impact of Thar coal would increase .There is a potential of saving 5 billion USD per year and this potential can be realized in the next 5 years.
It is hoped that the regulator will consider our suggestions while examining the tariff petition. The federal government and Sindh government should resolve the issue of implementation of Thar rail link, which has been delayed enough by now.
Other steps required are to involve third parties in coal mining beyond captive mining. Facilities and investments are required for processing Thar coal for industrial uses.
Copyright Business Recorder, 2023
