Coal output unlikely to be scaled down, inventory to substitute fuel import: EY

India's coal production is unlikely to be scaled down as the demand far outstrips the local supply available, global consultancy firm EY on Wednesday said.

It further said that the buffer inventories of coal will be consumed once the downstream plants start running at full capacity after the lockdown is lifted.

"Given that India's demand of coal far outstrips the supply available locally, miners are unlikely to reduce output of operations but continue to build receivables in the hope the inventories will eventually substitute imports of coal once the downstream businesses stabilise to normal...," Saurabh Bhatnagar, Partner and National Leader, Metals and Mining, EY India, said.

Coal miners, he said, have so far continued operations in near full capacity, except that the offtake of coal from the collieries on account of reduced electrical power consumption has created buffer inventories.

This inventory will eventually get consumed as the downstream plants go for full capacity utilisation post-lockdown, he said.

For example, despite continuing defaults in payments by the state generating companies which are adversely affecting the cash flow of the coal companies and huge accumulation of dues, smooth supplies are being ensured without any restrictive measures.

Under the lockdown measures..., the continuity of operations of manufacturing units of essentials goods, production units which require continuous process (crude steel manufacturing) and their associated supply chains, coal production, mines and mineral production, transportation, supply of explosives and activities incidental to mining operations has been ordered," he said.

However, as such, the mining industry was not impacted because of the government mandated guidelines on lockdown, but more on account of labour availability, demand slump on the far end of the value chain, the lack of liquidity of their suppliers and consumption points for the end products for which coal/iron ore is used as a base raw material, Bhatnagar explained.

As a post-COVID-19 scenario, integrated metals players will have to run calibrated product portfolios, which they will be sure to sell or create inventories of product formats.

"Much like the post GST, BS-VI imposed driven demand slump and its bounce back, the value added steel sector will be back on track and very rapidly in a post-COVID era," he said.

Any excess steel produced after meeting the domestic demand will be used for feeding up the large export markets, which are in the process of rationalising their own capacities for meeting own internal demand.

A large part of the demand and profitability of integrated metals players is dependent on how the MSME sector on metals opens up after the lockdown, according to EY.

Any government support to this sector of the value chain will have an upstream impact of cash flows, beefing up demand and lubricate the otherwise cash dry value chain, Bhatnagar said.

From a metals downstream perspective, such operations were mandated to shut during the lockdown, particularly, which are engaged in low value addition to the value chain of steel.

Such operations, he said, will need more time to stabilise and organise their businesses unless government/large integrated players support and financially help these players to get out of the current situation.

The metals industry which uses iron ore and met coking coal as key inputs has also had the benefit of being categorised as an essential category and has been running their plants, however at a lowered capacity, he added.

Volumes have not flown on account of a subdued or even non-existent demand of consumer durables and slowdown in the infrastructural and construction sectors, as per EY.

Turndown or switched off capacity imposes costs to integrated steel manufacturers and hence their desire to keep the plants running will generate high cost steel and may have to be liquidated at lower margins.