Global coal mining companies have seen a very good year in terms of realisations as prices have gone up in 2016, but that is not the case for India’s largest coal mining concern, the state-owned Coal India. Its realisations have actually fallen and the outlook for the immediate two quarters is certainly not looking good due to comparatively weaker demand.
Coal India had raised its prices in May this year. However, the company’s average price realisation per tonne of coal declined, thereby upsetting the benefits of the price hike. Further, if power demand remains muted in the coming financial quarters, the average realisation from coal sales may remain weak for the rest of the year too.
While coal prices were increased in May, any further increase looks difficult looking at demand, said sources, despite a sharp upturn in coal prices globally. Although, it is the government which takes the decision on any price increase, official sources added.
According to analysts, the demand for power will not accelerate unless industrial activity picks up pace in the country, as the state discoms’ industrial demand has a direct correlation with IIP numbers.
“As a result of lower power demand, coal uptake from Coal India by the power companies has been lower than earlier expected. This situation might prevail for the coming two quarters,” Debasish Mishra, a partner in Deloitte Touche Tohmatsu India LLP, said.
However, Coal India officials maintain that the global surge in coal prices will lead to increased demand of domestic coal; a situation from which, theoretically, Coal India stands to gain.
Nevertheless, with power generators in the country still stocked with the black diamond to generate a minimum of 15 days of power, and global coal prices swinging high, the future of Coal India’s average price realisation is shrouded.
The company increased the prices of lower grade coal (G8-G13) by 13.60-18.03 per cent, while reducing the prices of the higher grades. Lower grades are used extensively by power generating stations in the country and make up over 80 per cent of the total coal production by the company.
On an average, coal prices were raised by 6.29 per cent a tonne and Coal India had predicted to earn an additional revenue of Rs 3,234 crore during May-March 2016-17.
However, company officials reasoned that the sharp decline in higher grade coal prices, lacklustre coal demand, especially from the power sector – its key customer – and lower price realisations from e-auctions were the primary factors for the weakened price realisations in the April-October period this financial year.
While e-auction volumes for the company increased to touch 39.52 million tonnes (mt) during the April-October period (H1) of the current financial year, the average price per tonne declined by 27 per cent at Rs 1,463 a tonne.
“The auction prices are higher than the notified one. However, prices depend on the market conditions as well,” a Coal India official said.
Even as its e-auction prices took a hit, coal prices under Fuel Supply Agreement (FSA) also fell by three per cent at Rs 1,264 a tonne. These long-term FSAs to the power segment comprise at least 75 per cent of the company’s annual sales.
Again, company officials said that the fall is primarily on account of the lower demand for coal and the coal stocking situation in power plants.
The world’s largest coal miner’s total offtake showed a decline by about one per cent during H1 of the 2016-17 financial year, showing a trend of lower demand.
Industry analysts, however, are of the view that the fall in average price realisation is primarily on account of the government’s drive to contain grade slippage and raise the correct invoice for the grade of coal supplied.
Coal consumers and analysts alike have been blaming Coal India for grade slippages for quite some time; a concern, which the then coal secretary Anil Swarup took up to address.
“According to our estimates, grade slippages have been controlled, for which Coal India could raise the invoice according to the correct grade of coal supplied. This would have affected the net earnings and hence, the average realisation from coal sales fell,” an analyst said.
The current average price realisation at Rs 1,344 a tonne is below the 2011-12 prices.
In the second quarter of the current financial year, Coal India posted its worst result for a financial quarter since its listing with a 77 per cent fall in net profit at Rs 600.17 crore and a decline of eight per cent in its net sales at Rs 15,645.05 crore.
