Higher coal prices, demand are near-term positives for Coal India

Rising global coal prices amid the Iran conflict and potential substitution of gas with coal could boost Coal India's e-auction premiums and volumes in the near term

The ongoing Iran conflict has led to rising international coal prices. This could result in big gains for Coal India Limited (CIL) if it influences trends in coal e-auctions. Currently, e-auction premiums are 55-65 per cent over fuel supply agreement or FSA rates. However, back in the second quarter of 2022-23 (Q2FY23), the premium had spiked to 329 per cent during the Russia-Ukraine war. There may also be volume gains, especially if gas is replaced by coal in certain sectors through gasification (or otherwise).

 

Power demand has seen only 0.8 per cent year-on-year (Y-o-Y) growth in FY26. But if the coming summer is hot, there would be a spike in cooling needs. Indonesia’s coal export volume in calendar year 2025 (CY25) fell by 3.7 per cent Y-o-Y and this positively impacts CIL. 

CIL’s February 2026 provisional offtake was 62 million tonnes (Mt), marginally lower at 1.5 per cent Y-o-Y. Between April 2025-February 2026, offtake was 674.6 Mt, down 2.8 per cent Y-o-Y. CIL had moderate Q3FY26 results. Total operating income was ₹34,924 crore (down 5 per cent Y-o-Y) with volume of 189 Mt, down 3 per cent Y-o-Y. Operating profit was at ₹9,331 crore with margins at 26.7 per cent, down 670 basis points (bps) Y-o-Y. Operating profit per tonne was ₹495; it was ₹634 a year ago. The net profit was ₹7,157 crore.

 

CIL is looking at downstream plays and diversifications such as coal gasification projects (with BHEL and GAIL), investments in thermal generation and renewable energy (RE), and exploration and acquisition of mineral assets. It is expected to list subsidiaries such as CMPDI, MCL and SECL soon, which may unlock value.

 

The management claims long-term demand is intact, and CIL is targeting 5 per cent annual growth. Prices (FSA and e-auction) have stabilised post a recent run-up. Initial attempts at substitution of imported coal (40-45 Mt per annum requirement in power sector) with domestic coal have been encouraging. CIL is also targeting consumers in sectors like sponge iron and cement. There is competition from private commercial mining which is expected to reach a volume of 300-320 Mt by FY29.

 

In the medium and long-term, while coal’s share in power generation will decline as RE penetration increases, in absolute terms coal volume will grow. There is a correlation with gross domestic product (GDP) growth since power demand increases with GDP.  If RE capacity grows at current rates, and GDP grows at current estimated rates, coal demand will grow at 3 per cent per annum. If GDP grows at 7 per cent plus (long-term), coal demand may grow at 5 per cent.

 

CIL has a production target of 1 billion tonnes. By FY30, India's annual demand is expected to be around 1.5 billion tonnes with Coal India expected to account for a lion's share of this with any shortfall being met by private mining and imports. In non-power sectors, CIL is looking at sponge iron plants in eastern India, cement and also at import substitution.

 

India imports 40-45 Mt of thermal coal for power, and 150 Mt of high-grade coal for other industries. CIL is looking at this market. However, substitution is constrained due to lower calorific value of domestic coal. A rough rule of thumb is that domestic coal is competitive only at international prices of $70/tonne or more for higher grades.

 

Logistic efficiency is crucial due to rail infrastructure limitations, regional evacuation constraints and seasonal demand patterns. Power producers are sometimes cautious about holding inventory and at other times, there is a need to rapidly increase supply. CIL has been investing in first-mile connectivity projects and dedicated rail for coal evacuation.

 

Coal gasification could result in offtake to the fertiliser industry, ammonium nitrate manufacturing and direct reduced iron steel plants. Economic viability is benchmarked to gas prices. If gasification costs exceed that of gas, it is uncompetitive. Given the current squeeze on gas supply, this may be a short-term revenue source but long-term viability would be tied to keeping costs competitive.  

 

CIL has a large employee base which has reduced from over 500,000 to around 200,000 with steady net reduction in manpower. The next wage revision cycle is from July 2026 for workers. The expected range of increase is 14-17 per cent but actual outcome depends on negotiations.

 

The Iran war has led to investor interest in CIL. Value investors might look at the strong balance sheet, high dividend payouts and cash-flow generation.