Coal India to cut prices to take on competition

The move is aimed at competing against cheaper high grade coal from South Africa, Indonesia and Australia

To compete against cheaper and high-grade South African, Indonesian and Australian coal, while keeping its prices unchanged, Coal India  (CIL) recently strategised a move whereby it is giving up part of its charges levied previously on the consumers.

The coal monolith will no longer charge an extra premium from buyers for purchase of the full quantity of coal as had been done previously.

The initiative comes under the backdrop of a stressed situation in the power sector,  which is facing less demand for electricity from the distribution companies and  57 million tonnes (mt) of pithead stock idling with Coal India.

Although officials in the state-run company termed the move to “become more consumer-friendly”, it was widely believed that the actual reason for forgoing the premium is to push its sales further and clear the stock.

Under the revised terms, CIL has removed realisation of performance incentive for supply of higher grades of coal, namely the G2-G5 grades of coal which have a gross calorific value ranging between 6,700 to 6,100 kilo calorie per kg.

About 43 mt, or eight per cent of Coal India’s total production comprises these grades of coal.

“This will give a boost to both our power and non-power consumers who have fuel supply agreements (FSA) with us. However, it is not applicable on lower grades of coal,” a senior company official said.

The revision facilitates consumers to buy coal beyond 90 per cent of the annual contracted quantity under FSA without having to pay any extra charges.

This is termed as performance incentive (PI), which, under the previous FSA model, was based on a 0.15 multiplier to the simple average of the base prices of the coal supplied and the quantity supplied in excess of the 90 per cent committed in the FSA. In case the buyer needed coal more than 95 per cent of the quantity as laid down in the agreement, the multiplier doubled to 0.30.

However, after abolishing this practice, the buyers can now avail high-quality coal as per their needs, while escaping the compulsion to pay additional charges for the multiplier. “As such, there hasn’t been any reduction in the notified prices. We expect the consumers to now lift more coal”, the official said. However, with this practice in place, the impact on Coal India's revenue is expected to be minimal for the time being.

Power and coal minister Piyush Goyal, on a separate occasion had said that the country has already reduced Rs. 28,000 crore of coal imports and could save at least Rs. 40,000 crore in the coming days if the imported coal demand was fulfilled by Coal India.