The Centre’s decision to allow 100 per cent foreign direct investment (FDI) in the coal sector and allowing commercial mining of coal has left Coal India worried as it is apprehensive of losing consumers as well as its pricing power in the market.
Company officials are of the view that with these two developments, its largest consumer, NTPC may develop its own coal mining capabilities which in turn will result in reduced demand from it.
A Coal India official said as NTPC develops its own coal mining capability in the next 5-7 years, the world’s largest coal miner risks to lose 100-120 million tonne (mt) of coal supply to NTPC. Every year, Coal India supplies around 200 mt of coal to NTPC.
“The demand for our coal may fall once the sector becomes more competitive and other players enter coal mining. There will be more supply of coal and some of the coal consumers might prefer to purchase coal from sources other than Coal India”, the company executive said.
On the other hand, as new coal mining entrants start operations and attain economies of scale, Coal India may also risk losing its monopoly over pricing. Under the current circumstances, the company arrives at the notified price of coal based on several factors like coal supply and demand, projection of demand, global price trends and also evaluates the cost of electricity generation.
“However, we may not be able to increase coal prices in the long-run based on the current pricing mechanism as there may be other players who might offer coal at lower prices. If this happens, then there may be financial stress”, the official said.
The official reasoned that costs have been escalating and wage agreements will be up for renewal in the near future when salaries will increase.
On an average, Coal India’s current cost of production hovers around Rs. 1,300 a tonne and from the fuel supply agreements (FSA), its average realisation per tonne hovers around Rs. 1370.
Rupesh Sankhe, senior analyst at Elara Capital said that given the forthcoming liberalised coal mining regime, Coal India is most likely to control its employee costs which alone account for RS. 38,000 crore per annum.
Sankhe is of the view that price trends will largely be based on the notified prices of Coal India and given this situation, while private commercial miners will have to sell their total produce at those prices, Coal India will sell around 88-90 per cent of its produce at prevalent prices. The rest of the volume will be routed via e-auctions where the company enjoys a 15-20 per cent premium over notified prices.
Coal India officials however, are of the view that with increased coal availability e-auction prices might be haemorrhaged.
A section of company officials believe that economies of scale will eventually determine how competition will fare. An official said that under the present situation, no other company can match the production volume of Coal India which is in excess of 600 mt and a higher volume play allows a miner benefits like lower production costs, larger say in pricing and others.
“But eventually, the smaller commercial miners may scale up their operations with FDI boost and then the situation will become much more competitive. However, I don’t see happening it before the next five years”, a Coal India executive said.