Can Coal India increase production sufficiently?

Experts say supply problems can also be addressed through improved logistics and higher allocation to efficient plants

With the initial heat and dust around Coal India Ltd’s (CIL) fuel supply agreements (FSAs) having settled, experts are now saying these are unlikely to improve the situation dramatically. For starters, there is no clarity on how much of the 80 per cent coal supply guaranteed would be imported, given the huge price differential between domestic ($20/tonne) and imported ($100/tonne) prices.

Analysts believe the 12th Plan would target a seven per cent increase in production for CIL. Explains Arun Kumar Singh, senior analyst at HSBC Securities and Capital Markets: “If this target is achieved, production would increase from 435 mt in FY12 to 615 mt by FY17. We are estimating a production of 560 mt in FY17. Further, stringent monitoring of production from captive mines is expected.”

CIL’s production has stagnated at 435 million tonnes. The annual Production growth is usually not more than five per cent. Analysts say even if CIL increases production by 30 mt each year, it would go a long way in resolving the problem.

Power sector players and experts believe a lot of supply problems can be addressed through improved logistics and higher allocation to efficient plants. There are multiple options, based on the current rules/policies and aided by the new FSA directive that stipulates a minimum supply of 80 per cent. According to Edelweiss Securities: “These include economical coal transportation, higher allocation to efficient plants and price pooling among similar grade users. These steps would translate into savings from rail freight and economies of scale, which would help reduce the impact from inevitable coal imports.”

While CIL has been asked to sign FSAs, analysts say a similar directive should have been given to the railways ministry to complete projects providing connectivity between mines and power plants.