CIL May Increase Coal Prices

Coal mining company, Coal India, is, according to reports in DNA and Economic Times, again under pressure to increase the coal prices. Our readers would recollect that in January, in a similar attempt, Coal India wanted to move from the useful heat value (UHV) pricing norm to the gross calorific value (GCV) pricing norm. Under that norm the number of coal categories would have increased from 7 to 17. This also would have increased the coal prices. However, CIL’s move met with high resistance from the related entities and thus it was forced to call it back.

According to DNA, CIL’s legal team is checking the draft of the new fuel supply agreements (FSAs) which will be put up for board approval on Monday. The newspaper has also mentioned that the documents have been updated according to the GCV pricing norms. We believe such a move is quite necessary for the company as it will have to divert the highly profitable e-auction coal to the power companies. The company is also expected to attract financial penalty in case it is unable to honour 80 per cent of the contracted quantity mentioned in the letter of assurance.

Meanwhile, the Children’s Investment Fund (TCI) has said that the presidential directive on Coal India is not in public interest. The FSA system is of benefit for few while it encourages corruption in the country. TCI has also pointed out that the FSA system facilitates direct transfer of USD 19 billion of subsidy to increase the profits of the private sector. Coal India would have to take note of this while setting up the new prices as well as signing the FSAs.

Thus Monday would be a very important day for the investors since the entities with which CIL will sign the FSAs may be announced. Besides, we expect the company to declare its stance on coal pricing as well as its plans to increase coal production. Its action will give direction to the power stocks. If CIL goes ahead with the new GCV pricing then despite signing the FSAs the stocks will fall. If it sticks to the old pricing norms then there is a good chance that the power stocks would gain by a few points. Investors can take note of this while chalking out short-term investment strategies.