How govt's tight control is slicing away Coal India's creamy layers

Larger shares of the state-owned miner's production are sold significantly below global benchmark prices, deterring global investors from participating in divestment plans

When global thermal coal prices crossed $450 a tonne in September, reflecting a surge in demand for the fuel in Europe, Coal India, the world’s biggest producer, was charging less than a tenth of international rates for a similar grade of fuel. A portion of the miner’s produce is auctioned, which last fiscal fetched an average premium of 88 per cent over the company’s notified prices, according to ratings agency CRISIL data. The premium on such auction sales surged last quarter but the quantity of coal sold at market rates declined from last year’s levels.

Successive Indian governments have shackled Coal India, preventing the miner from profiteering when coal prices rise. In 2012, two years after the miner went public, the government issued a rare presidential decree ordering the company to supply fuel to private sector generators on long-term contracts at notified prices, leading to protests by minority shareholders that the order will hurt profits. New Delhi still wields a tight control, a disservice not only to the company but to its minority shareholders. Slicing away Coal India’s creamy layers also puts off global investors from participating in New Delhi’s plans to divest additional stakes in the company.

Most of Coal India’s 623 million tonnes (MT) of production in 2021-22 was sold at artificially low prices to power plants. For instance, this March, the price of Indonesia’s Kalimantan 4,200 kilocalories a kilogram (kcal/kg) averaged $111 a tonne, excluding delivery and insurance, while Coal India’s state-set price of a similar grade was between $12 and $14 a tonne. Indonesia is India’s biggest supplier of imported coal.

“Coal India’s mandate is to meet the country’s energy security and keep power tariffs low,” said Ritabrata Ghosh, vice-president at Mumbai-based ratings agency ICRA, a Moody’s affiliate. “If it was a private company they would have made enough money for 20 years at today’s prices.” Coal prices should remain high in the medium and long term, driven by robust demand, according to the International Energy Agency. The Paris-based energy club of rich nations sees global coal demand growing by around 1 per cent this year to about 8 billion tonnes this calendar year, matching its 2013 peak.

“It would be disastrous for the country’s economy to have import parity prices for domestic coal,” said Ajay Shankar, distinguished fellow at TERI and a former senior bureaucrat in the power ministry. Coal India supplies coal to power plants via long-term agreements at notified rates, which are typically much cheaper than imports.

Indonesia’s reference coal price (HBA), based on 6,322 kcal/kg GAR coal with 8 per cent total moisture content and 15 per cent ash, at $319.22 a tonne for September has more than doubled in a year. Coal India’s notified rate for a similar grade was $41 a tonne. This is partly because of the high level of impurities such as ash content, and partly because New Delhi wants to supply cheap fuel to generators so that they can keep tariffs low for residential and agricultural users.

India’s coal-fired plants still meet more than half of the country’s power demand. Renewables are paltry in comparison, according to Central Electricity Authority data. India’s coal consumption is estimated to grow at 4 per cent a year to meet rising energy demand, McKinsey said in a recent report.

Auctions were introduced to enable Coal India to improve supplies to customers without term contracts, and increase profits. “E-auctions help discover market-based pricing of coal and allows buyers to meet their short-term/seasonal requirements, and allows traders and such end users who are not able to procure coal through the institutionalised linkage route,” said Satnam Singh, director, energy, CRISIL. “The premiums received in e-auctions help Coal India achieve better profitability, especially given that the miner has not increased its notified prices for the last four years.”

For instance, in September, Coal India realised a 276 per cent premium for its average coal grade over notified prices on 4.7 MT of sales, according to ICRA data. Premiums averaged more than 300 per cent over notified prices last quarter.

Ironically, Coal India used to sell more coal via e-auctions when it secured lower premiums as global prices trended lower. The miner sold 124 MT in fiscal 2020-21 at modest premiums because high-quality coal globally had hit lows of $50 a tonne, a fraction of today’s levels. Auction volumes declined in 2021-22 to 108 MT — when premiums nearly doubled over notified levels after international prices surged to over $300 a tonne. New Delhi trimmed auction sales to divert scarce fuel to state generators, which carried only a few days of stocks.

Sales at market rates have slumped further this fiscal despite coal trading at nearly $460 a tonne in September. Just 10 MT of coal was sold via auctions in the July-September quarter by Coal India, halving from the previous quarter, after stocks at generators dried up in summer, according to company data. Around 142 MT was supplied under term agreements. The company supplied only 31 MT via auctions in the first half of this fiscal despite premiums quadrupling, compared to 54 MT in the October 2021-March 2022 period.

Surging peak demand for electricity this summer drained stocks at generators. Imports turned unaffordable. That prompted New Delhi to divert auction volumes to power plants, an industry official said. Sale of coal via auctions gets affected if demand for power surges, Coal India Chairman Pramod Agrawal has told analysts.

“While the realisation on e-auction coal is generally market-linked depending on the alternative, which is the imported coal price, we have observed that the prices even on e-auction coal are much lower than imported coal prices,” said Bhanu Patni, associate director, India Ratings. “Having said that, given the fuel supply agreement (FSA) coal is governed by pricing regulations, e-auction premiums have still been healthy, with these premiums over the FSA coal having jumped to around 200 per cent.”