Quenching the thirst for coal

Shashi Ruia, chairman (left) and Ravi Ruia, vice chairman of Essar group

India is on tear to build new electrical power plants, and all of them need fuel. One of the leading builders of new plants is the Essar Group, one of India's largest conglomerates and led by the billionaire Ruia family. To meet the demand for fuel, Essar and other Indian groups have been buying coal from Indonesia and elsewhere, since India's domestic coal output of 585 million tonnes a year will not be enough to fuel all these new electrical plants (at least half of India's existing plants are coal-fired and many of new plants being built will also need coal). Energy consultant Wood Mackenzie estimates that coal demand in India might double to 1 billion tonnes in 2015.

To that end, the Essar group is making some big forays into the Indonesian coal sector.

It purchased theAries coal mine in April 2010 for $118 million. The Aries mine site covers 5,000 hectares and is located in east Kalimantan and has good thermal coal with low ash and low moisture. The mine has an estimated 64 million tonnes of mineable reserves and has a potential annual output of 4 million tonnes. The mine will add to the Essar group's coal resource base, which currently is 275 million tonnes, most of it in India.

The mine is expected to start production after the completion of the infrastructure work, such as a haul road for the transportation of the coal, which hasn't been easy to do given land acquisition issues.

"Indonesia has maximum potentil in terms
of the size of the market."

The mine's coal output will be sent to India and be a source of fuel to run Essar's power plant, Salaya II, being built there. Its other plant with a similar name, Salaya I, is also another possible consumer of Aries' coal. In addition to Aries, the Essar group has purchased two more mines in Kalimantan and Sumatra that will be operational after they receive the forest clearance.

The Essar group currently operates three power plants in India,

Prashant Ruia, Essar group chief executive.

With the addition of three more power plants, the capacity will expand to 4.5 GW by 2012. With other plants to be added, Essar is aiming to have 9.7 GW by 2014.

What the Essar Group is doing in Indonesia and India is part of long-term strategy to refocus the group on some of its core competencies in power, mining and steel. The use of Indonesian coal for Indian power plants matches up a ready supplier with an eager consumer. At the moment, India is in desperate need of new electrical power (as is Indonesia). The gap between the demand for power and its supply has traditionally run at a deficit and that gap now stands at 10%, meaning there's 10% more demand for power than supply to meet it. That gap may not close anytime soon. With the economy growing at 8%, the power sector is only growing at 5%, even with all the new projects underway.

Source: Wssar Energy presentation to investors,

Source: Essar Energy presentation to investors,
August/September 2011.

To help with its integrated strategy, the Ruia family consolidated all its power projects under one company, Essar Energy, which raised $1.3 billion in a public offering on the London Stock Exchange in May 2010, the largest-ever Indian IPO on the London exchange and the second-largest Indian IPO ever. It was also the biggest IPO on the London exchange since 2007.

Indonesia is not a new country for the Essar group. The Ruias have learned their lessons well, establishing a factory in Indonesia in 1996 only to face the Asian financial crisis the next year. "We just started and we experienced a crisis and that took away a few years. After that the country went through a period of slow recovery but the last few years things have picked up again," says Prashant Ruia , who is the group's chief executive. Despite the crisis, the Essar Group had a firm belief in the future of the country and continued its business and investment. "Indonesia has maximum potential in terms of the size of the market. We were interested in that market. When we came to this country, the population was just 210 million, today it's running at 240 million," says Prashant.

The Essar Group is active in more than just coal in Indonesia. It also operates steel plants here as well as recent news of an interest to acquire two coal bed methane projects in the country. In the recent years the size of production of Essar Steel in Indonesia has hovered around 400,000 tonnes of steel from a start of 200,000 tonnes. The company remains the largest producer, by output, of cold-rolled steel in the country. It has also expanded into other sectors, such as retail and hypermarts. In February 2011, the group opened its seventh Essar Hypermart in the country. Prashant was one of six co-chairs of the World Economic Forum on East Asia held in Jakarta in June 2011. He also comes to visit Indonesia frequently to check out the steel factories and other investments.

When asked about the nuances of investing outside India, Prashant replies: "Since we are large investors in various sectors, the concerned country's regulations are a big issue. Competitiveness we don't worry about because we are investing in sectors where we believe we are competitive. We have the skills and the ability to compete otherwise we wouldn't invest. We also only invest in areas where there is an inherent demand, whether it's Indonesia or India. So we are basically investing to meet that demand. India is short of natural resources such as coal, iron ore, oil and gas and that is why we are investing internationally [to secure supply]," says Prashant.

Major player

The Essar group has grown from humble beginnings to become one of the largest Indian multinationals. The Ruia brothers, Shashi and Ravi, started their businesses in Chennai in 1956 under the leadership of their father Nandkishore Ruia. The Essar group was established in 1969 by the brothers after the death of their father. They started with the construction project in Chennai port and moved on to other opportunities until they became the first private investors to buy a tanker in 1976. A few years later, the group invested in the shipping and drilling businesses.

Then in the 1990s, Essar group started its first steel investment by building a sponge iron plant, then a pellet plant and finally a fully integrated steel company. Today the Essar Group spans a number of sectors and countries. It has estimated total revenues of $17 billion, employs 75,000 and is present in more than 25 countries. The family's business interests span oil, gas, energy, shipping, steel, power, ports and telecom. They rank as the 42nd richest people in the world, with an estimated combined net worth of $15.8 billion. Prashant, 43, is the eldest son of Shashi Ruia and the nephew of Ravi Ruia.

Quenching the thirst for coal

India's Essar group is investing heavily in Indonesia to secure coal for demand at home and to tap into the growing local consumer market.