Coal India to tweak e-auctions to check falling prices

KOLKATA: State-run Coal IndiaBSE -4.66 % plans to change its e-auction supply strategy to bump up price realisation, which has dipped on account of abundance of the fossil fuel in the domestic market and availability of cheap imported coal. For the world's largest producer of the fossil fuel, the fall in realisation per tonne ofcoal comes at a time when it is already facing a rise in input costs and salary bills.

A senior Coal India executive said that to tackle this, the company plans to change its supply strategy for e-auctions, which account for the bulk of Coal India's profits. "We need to do an effective market study and look at supply strategy that would meet only the residual demand through market intervention," the executive told ET.

Analysts say that if the trend of rising costs at Coal India continues till 2017, the company may see a large chunk of its margin getting wiped off as a 20-30% rise in salaries is expected during wage talks which are due in two years. Salaries constitute almost 50% of the cost of coal production. Coal India usually sells it entire output or as much as it can load on rakes and trucks. However, it is fast losing its ability to dump any quality of coal at any price because it's heavily discounted rates are no longer competitive in the face of plunging international price of the fuel and surfeit of coal in the market.

Analysts have forecast a further 10% fall in global prices this year. "If it does, Coal India would lose its price advantage even for inland power plants," another CIL executive said. Falling international price of coal has not only made Coal India's rates uncompetitive, but also made it difficult for the company to raise prices. Company executives said raising prices will help the company hold on to its margins.

Coal India has been allowed to sell as much coal as it can through e-auctions. However, people aware of the matter said the company's strategy now would be to auction only the volume of coal that is required in the market. Implementation of the strategy may have already begun. Despite a near 12% rise in overall coal production, Coal India sold the same volume of coal at 16.78 million tonnes (MT) during the quarter ended June 2015, against 16.8 mt in the year-ago period.

Despite a proportionate decline in eauction volumes, realisations kept declining. During the quarter ended June 2015, the company managed a realisation of Rs 2,184 per tonne againstRs 2,246 per tonne in the previous corresponding period. This brought average realisation from Rs 1,487 per tonne in the previous corresponding period toRs 1,465 per tonne during the quarter ended June 2015.

In the domestic market, the thermal power sector—the largest consumer of coal—has abundance of coal. Now every power plant holds enough coal to operate for 29 days. However, new power capacity addition has dragged down capacity utilisation of these plants to about 59%. Distribution companies are not buying enough power, leading to falling demand for coal.

In addition, the government had announced a scheme under which power plants with no fuel supply contract will be offered 10 mt coal in two categories. CIL is undecided at the moment whether to consider this as part of the total eauction volumes or mark it separately.