Will Coal India’s price hike make imported coal a more lucrative option?

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With an eye on profit margins of nearly Rs 2,500 crore a year, Coal India (CIL) which accounts for over 80% of India’s coal production has gone ahead with a steeper than expected price hike for several grades of thermal coal used for power generation.

CIL believes that the increase in prices for its G11 (coal of gross calorific value, or GCV between 4,000Kcal/kg and 4,300Kcal/kg) to G13 (GCV between 3,400Kcal/kg and 3,700Kcal/kg) grades can boost its revenue by Rs 6,421 crore annually and by Rs 1,956 crore for the rest of this fiscal.

As it is being reported, there has been an average price rise by around 10%, out of which a good portion will be used for salary hike of its three lakh workers as well as its officers. CIL thinks that in this way, the consumer will be charged on actual GCV consumption which is a fair move.

While CIL’s current mechanism prices coal on the basis of grades, now on it will be done on the basis of GCV, which is the total amount of heat released when one unit of coal undergoes complete combustion, of the fuel. CIL divided its wares into 17 different grades for this purpose.

For instance, CIL’s G10 grade material is coal of GCV between 4,300Kcal/kg and 4,600Kcal/kg, and at present price for this band is fixed on a mid-point basis: that is, the price of the material will be the price calculated for 4,450Kcal/kg stuff. The new method will allow the company to divide this grade into several layers and price them accordingly. 

CIL says this is to align its pricing system with the prevailing international standards.  However, while aligning the pricing mechanism to the  international level is likely to be a flip side story, the upkeep of the quality of coal will, in all probability, occupy the centre stage sooner than later.  

Will CIL be able to cope with quality? That too, with the swiftness with which it increased the prices?

The company is confident of doing it, but experts may not agree. More so when there is nothing in the past to call in to confirm this. It was not long ago that Coal Controller’s Organization (CCO) downgraded 177 of CIL’s 413 mines for poor quality outputs. The downgrade in April last year was on the basis of around 2,600 samples collected from across mines owned by CIL’s subsidiaries.

Further, the coal quality row between CIL and NTPC has been in the open for many years now. Industry insiders admit in private that not many can afford to be loud about quality, like NTPC does, when the coal major enjoys a monopolistic edge in the domain.

That said, resolving the quality issues is not an easy job as well, as it might look from outside.

With close to 310 billion tonnes in its belly, India is the fifth largest country in terms of coal reserves. But this is only about quantity. On quality front it has always been behind countries such as South Africa and Australia as most of India’s coal seams are laden with stones and boulders. Thus, even if the company wants to ensure that each power plant receives specified grades, rolling out a mechanism to ensure strict quality standards for a massive production of over 500 million tonnes becomes a nearly impossible thing in foreseeable future.   

Will consumers stay tuned to CIL, or will they shift to imported coal?

“Coastal power plants without doubt will use the refined coal from Australia, South Africa or other international destinations since the quality will be guaranteed,” said a Mumbai-based coal trader.

“CIL needs to walk on a tight rope to meet consumer expectations. If it supplies a coal with a lower calorific value than what has been paid for, then the company needs to refund the customer the differential amount. This is going to be a cumbersome affair. A shift to imported coal is imminent. Whoever has access to import, will go for it,” he added.

Terming the price hike as a negative move, credit rating agency ICRA said 15 to 18% increase in prices will hurt the power sector. The cost for generation of coal-based power plants would increase by 13 to 15 paise per unit (kWh).

“CIL had tried to sell its top grade coal at a higher price earlier too, but it hardly found buyers in the market for those grades. Entities had switched to imported coal and it had to reduce the prices of those grades to make them marketable. The current move will also backfire,” a leading analyst with a global energy consultancy told Indoen.

“For firms which have a power purchase agreement with CIL, the price hike as such may not have a big or negative impact. On the other hand, Independent power producers that have short-term supply agreements with CIL will suffer,” the consultant added.

Another trader from Mumbai said CIL decision will have a dampening effect on power industry in the near term itself. With summer months coming up demand for electricity will shoot up in north India. Many players will focus on short-term buying and overseas procurements will see a jump in the next two-three months. Power plants situated near coastal regions will be the real gainers.

However there are experts who think the overall effect of price increase will be marginal.

“International coal prices have been rising steadily over the last few months. For instance, the FOB price for the 4,200 kcal/kg GAR coal from Indonesia surged by over 30% in the last one year to around $49/tonne as on February 1. So, I think, this should, in a way, balance the CIL decision,” a coal expert, who didn’t want to be named, said.

So in the wake of the latest price hike by CIL, is the country looking to increase imports to fulfill the demands of the power sector? Or should CIL reconsider its decision to increase the price in view of a likely failure to market its wares, as was the case earlier? Will Coal India be able to deliver on fresh contracts with quality measures in place?

These are some pertinent questions that will crop up for discussions as we move further.