Coal India slumps 5%

By asking Coal India to sign long term fuel supply agreements (FSA), the Government has shifted the financial risks faced by power producers to the coal major. This spooked CIL shareholders, with the scrip tanking by 5.4 per cent to close at Rs 321 on the BSE on Thursday.

However, analysts said the key issue now is whether Coal India will be forced to sell imported fuel to power producers at a huge discount. If it happens, the company will have to take a major hit as the FSA pricing is linked to the power purchase agreement signed by the power producer with the distribution agencies.

Already, the domestic coal supplied by Coal India under the current FSAs is 30 to 60 per cent lesser than the international prices, an analyst said.

Despite such sales at discounted prices, Coal India reported a 54 per cent rise in December quarter profits at Rs 4,037 crore. The company, however, is able to supply only half the committed quantities as per the FSA entered till March 2009. It has not signed fresh FSAs since then.

Power producers claimed that the new projects commissioned since April 2009 have been running at a sub-optimal capacity as they are unable to get sufficient coal from the state-run firm. They had also claimed that investments running into thousands of crores were at risk due to inadequate supplies from the coal major. However, they are also reluctant to run plants on imported coal owing to prevailing high global prices.

Coal India has been struggling to raise its output and has been missing production targets due to the delays in securing environmental clearances and land acquisition issues. The company is unable to open up new mines and production from existing mines has almost saturated, sources said.

In fact, Coal India made an unsuccessful attempt last year to import coal through long-term off-take contracts and had even invited bids from global suppliers. The attempt fell through because power producers backed out to lift the coal at international prices.

As per the 12th Plan estimates, Coal India is projected to increase its output to 615 million tonnes by 2016-17 as against the targeted 440 million tonnes for 2011-12. The company may have to resort to imports of an estimated 65 million tonnes by 2016-17 to meet the committed supplies due to a shortfall in production and demand.

With the latest mandate from the Prime Minister's Office, the question now is whether Coal India will be coerced to take the burden of high international prices. “There is a lack of clarity on where the production will come from. Coal India will have to take a significant hit if it has to supply imported coal as per the FSA,” said Mr Bhavesh Chauhan, Analyst at Angel Broking Ltd.

“On a positive note, the company might get speedy clearance for the mining projects. However, production from new projects could be slower as it takes a couple of years to develop new mines,” Mr Chauhan said. “The PMO order is still a proposal and nobody knows how it will be executed,” he added.

Besides this, the incoming CIL chief – the PSU has been headless for over a year -- has to grapple with the logistics issues as availability of rakes to move the coal from pitheads to plant sites is still a concern. The company might divert a portion of coal quantities from the e-auction to meet the FSA commitments.

COMMENT NOW