CIL import plan spurs debate on pricing mechanism

Coal India Ltd's plan to start importing 10-15 million tonnes (mt) of thermal coal - through long-term (10-year) sourcing contracts - beginning next fiscal seems to have fuelled a policy-level discussion on the pricing mechanism of such imports.

According to sources, if the initial discussions between the Plan Commission and the Union Coal Ministry are of any implication, there are views that the overseas coal be offered to the Indian power sector at a cheaper price than the actual value of imports by way of pulling, preferably partially, with CIL's domestic offerings.

In economic parlance ‘pulling' stands for averaging. Though there were some suggestions to pull the entire imports with identical varieties of domestic coal, it was felt that any such mechanism could be heavily in favour of users of imported coal and may attract opposition from the power sector itself.

While the discussions are yet to take any formal shape, sources say the focus of the discussion recently shifted towards selling imported coal at a marginally lower price than the actual value (of imports) and recover the loss on imported coal by way of an across-the-board increase in coal prices.

Impact on coal prices

It is considered that since CIL's projected imports are hardly two per cent of its projected 440 mt domestic production in 2011-12, the impact (of selling imported coal at partially pulled price) on domestic coal prices will be “negligible”.

According to “ Indian Coal Market Watch ” published by mjunction – an e-commerce joint venture of Tata Steel and SAIL – India had imported South African coal at an average price of $85 a tonne (on fob basis) in 2011.

Assuming an average landed price of $100 a tonne and an exchange value of Rs 45 a dollar; a back-of-the-envelope calculation suggests that CIL would incur a loss of Rs 450 crore to sell 10 mt imported coal at 10 per cent discount to actual value. The loss can be recovered by enhancing the domestic coal prices by a little over Rs 10 a tonne against a total production of 430 mt (2009-10).

Rough estimates suggest that increasing the price of coal by Rs 10 a tonne may escalate electricity tariff at the consumer end, by 1 paise per unit

Larger issues

CIL has already proposed that it would enter into long-term contracts only if the price is a minimum of 10 per cent lower than the index price of the corresponding period of import. The proposal has already resulted in submission of as many as 29 EoIs (expression of interest) to supply a total of 250 mt of coal for 10 years through such contracts.

An undercutting over and above such low prices should necessarily convert CIL into the most sought after importer in the country. The larger impact is CIL would indirectly be a “canalising agency” (a term which was in existence during the control regime) and would end up importing much larger quantities than projected.

While the future will tell how things take shape, CIL chairman Mr Partha S. Bhattacharyya was recently heard telling, albeit in a lighter vein, a coal importer from the power sector: “If we start importing you will turn to us”.

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