Coal India To Import Coal If Required

After receiving a presidential directive, Coal India (CIL) has decided to sign agreement with 50 power companies. At this time it is not clear which power generation companies are included in the list. Looking at the recent developments there is ample scope to believe that private power companies will also be included in the list.

This looks very positive for the sector as nearly 50,000 MW of capacity is currently facing power shortage. Recent media reports have quoted S Narsing Rao, CMD of CIL, saying that CIL in the current scenario will be able to assure 60 per cent of the assured coal supply to the power utilities without any difficulty. CIL could be looking to divert the high-priced e-auction coal to the power companies. He has also said that the open cast mines hold the key for growth in coal production.

To reiterate an important fact, CIL’s production numbers have been more or less flat for the last three years and it has missed its production target in the last fiscal (FY12). For the next fiscal (FY13), the target is set to 470 million tonnes (MT) which is 34.16 MT higher as compared to last fiscal’s production numbers. To meet this target CIL is looking at ramping up production in the existing mines. In case it fails to do so, CIL may also look to import 10 MT of coal.

CIL was expected to sign the fuel supply agreements with the power companies by March 31, 2012, a deadline it missed. Also, there was confusion about the penalty clause introduced by the government. According to NDTV Profit, Coal India may attract a penalty of between 10-40 per cent if it fails to meet 80 per cent of the assured coal supply. On the other hand, CIL is also expected to gain if it meets a level of higher fuel supply. There is no clarity about this, however. 

The power stocks which are expected to rise in value have, however, been trading in losses. One of the recent moves by Indonesia has dragged the shares down. Indonesia, which is one of the largest coal exporters, has proposed 25 per cent tax on coal exports to prevent the over-exploitation of its coal mines. Besides, it has also said that this tax will double to 50 per cent in the next two years. Currently, a total 9,000 MW of generation capacity is dependent upon Indonesian coal and another 10,000 MW is under execution. This includes capacities from Tata Power, Reliance Power, Adani Power, Lanco Infratech, etc.

With such a heavy burden on the companies the cost of generating power will go up. The sector is handicapped as it cannot pass on the prices and hence these companies may have to bear losses if there is no clarity on the fuel supply agreements as well as a fixed deadline from CIL. The domestic coal demand and production is expected to rise to 980 MT and 715 MT by 2017, leaving a gap of 265 MT to be met through coal imports. The earlier move by CIL to introduce the new pricing system has met with higher resistance by the power companies. Under these circumstances it needs to be seen how much of coal will CIL import and how it will price it. With questions like these remaining unanswered, what is required urgently is absolute clarity.

Having said that, we believe that there would be a sentiment-driven short-term rally which was seen in the last quarter. Investors willing to take risks may accumulate stocks like Tata Power, Adani Power, Lanco Infra, GMR Infra, etc for some short-term gains. CIL, on the other hand, will remain under pressure as e-auction coal is a cash cow for it. Besides, imports will also eat into its profits. For CIL this looks like a complete mess.