)
With the global prices of thermal coal recently plunging below CIL’s price of best-quality coal, the traditional price differential between domestic and international rates has been somewhat eliminated. This implies, the impact of the price-pooling mechanism on domestic companies would be less severe. In fact, the narrowing of the gap between domestic and international prices has negated the entire basis of pooling — differential with cost of imports — raising doubts on whether the mechanism is even required.
“The fundamental reason for pooling is to spread the price differential between domestic and imported coal evenly across projects that have coal linkages with CIL. A narrowing gap between the prices voids that assumption and, hence, might alleviate the need for price pooling,” said Dipesh Dipu, partner, Jenissi Management Consultants, an energy- and resources-focused consultancy.
For some projects, depending on their location and coal sources, it might now be economical to solely depend on imports. The Union Cabinet has already given its in-principle approval to pooling. The total cost of imports has been worked out to Rs 72,000 crore by 2017 and the mechanism is expected to lead to a 21 per cent jump in domestic coal prices.
CIL has raised prices five times since deregulation in 2000. The previous price increase, in January 2012, had made domestic coal dearer by an average 12.5 per cent over the Rs 1,600-per-tonne average price prevailing then. This pushed the price of highest-quality CIL coal — with calorific value between 6,700 and 7,000 kilocalorie per kg — to Rs 4,900 per tonne. Following protests, the price was brought down marginally to Rs 4,870 per tonne a month later. This corresponds to $90 per tonne, based on the average rupee-dollar exchange rate of 54 over the past year.
For supplying coal with quality exceeding 7,000 kcal, CIL charges an additional Rs 150 per tonne.
Global thermal coal prices increased consistently, from $25 in early 2000s to a peak of $190 in 2007, primarily owing to a rising demand from China. Thanks to the global meltdown of 2008, prices fell to $120 in January 2012. With the decline continuing over the past year, price of coal traded in the Asian seaborne market have come further tumbling down 29 per cent to under $85 per tonne at present, according to data sourced from Platts, a Singapore-based provider of benchmark energy price assessments. The historic slump of last year occurred as other factors added to subdued Chinese demand.
“Two factors coincided to spark a heavy decrease in spot thermal coal prices. First, a growing oversupply in the market as coal from Colombia and the US, traditionally traded in the Atlantic market, spilled over into the Pacific market. This increased the competition in the Asian market and gave Chinese and Indian buyers a wider range of coal to choose from. Second, a significant number of Chinese buyers suddenly decided in June and July they wanted to renegotiate prices in spot deals. Part of this was due to pressure from the falling domestic prices in China,” Platts Senior Editor Mike Cooper told Business Standard.
For comparison, BS assessed the movement of two global benchmarks — Australian Newcastle harbor and European ARA prices — over the past year. The price graph shows the slump in prices closed the gap between domestic and international rates in June last year. Since then, the global rates have moved largely parallel to the $90-per-tonne mark. In fact, the Australian coal price came down to as low as $78 per tonne in mid-October. However, the average CIL price of Rs 1,600 per tonne is still cheaper than global prices.
CIL attributes the trend to not only a dip in global prices but also the company’s own policy decision that was taken while raising prices in March 2011. “The management had decided to peg coal meant for unregulated customers in the sponge iron and cement sectors closer to international rates. While our prices of A & B quality of coal were still 15 per cent lower than global rates, the slump in global prices in 2012 breached even that 15 per cent differential,” a top CIL said.
Pooling is not the only area facing collateral impact of the new trend. For the auctioning of coal reserves being planned, the erosion of the price differential means applicant companies will have to pay less for winning bids. The floor price of bidding will be based on the “intrinsic value” of a mine which, in turn, will be calculated using either the global benchmark prices or domestic prices offered by CIL. The power ministry has already asked the coal ministry to link the intrinsic value to CIL prices or give 90 per cent discount in case global prices are used as benchmark for calculation.
The new trend will also have a bearing on the future price increases by CIL. While domestic prices are unlinked with global trends, as the government continues to wield control over CIL’s pricing decisions, the globalisation of domestic prices would make CIL’s case for a hike less valid as consumers might switch loyalties.
“For now, CIL may be comfortable to hold on to the current level of pricing for such higher-grade coal. Though, going forward, the international prices seem headed for a rise over next three years. This might give CIL a cushion for a rise,” Dipu said.
Experts also point out that, after taking freight cost into account, CIL’s price might not be much higher than imported coal. Imported coal of the Indonesian origin, with a calorific value of 6,300 kcal, which landed at Vizag port on February 28, was priced at Rs 5,150 per tonne ($81 free on board, plus $11 freight cost), according to data sourced from resources research firm Oreteam. For comparison, CIL sells equivalent-quality coal at Rs 3,970 per tonne. With a freight cost ranging between 10 per cent and 15 per cent, the total cost of this coal goes up to Rs 4,370 per tonne.
If, as expected, prices go up later this year, the new trend of a diminishing gap in domestic and global prices might not last. However, it might have had done enough damage by delaying crucial reforms.
