‘Selling imported coal on a notified price by CIL should be implemented’

Feb 12 2013, 09:22 IST
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What are the issues to be addressed while selling coal at a notified price? (Reuters) What are the issues to be addressed while selling coal at a notified price? (Reuters)
Summary'Pooling prices of domestic and imported coal will take away the price advantage of CIL.'

The former chairman of the world’s biggest coal miner Coal India Ltd, Partha S Bhattacharya says pooling prices of domestic and imported coal will take away the price advantage of CIL.

In an interview with The Indian Express, he suggests using coal mined from under ground mines of CIL as the basis to benchmark with imported coal. Excerpts:

The government has mandated CIL to resort to pooling the prices of imported and domestic coal for the larger interest of the economy. Was there a pressing need to do so?

The programme for capacity addition in power generation is undisputedly a major inclusive development agenda that cannot be allowed to fail. To meet the FSA commitments, import of coal by CIL has become imminent. Imports, even if done by executing long-term offtake contracts with major coal producers of the world (possibly the only way to ensure competitive procurement with transparency), cannot guarantee fixed prices of coal for a long period. Also the imported coal prices are significantly higher than domestic prices. Both factors, volatility and higher price of imported coal have driven the newer power producers, not covered by long-term FSA with CIL guaranteeing 90 per cent availability to seek pooling of price of imported coal with domestic coal. The government, as per recent media reports, have taken an in principle decision in its favour. The details are being worked out.

What are the issues to be addressed while selling coal at a notified price?

The basis of notifying such prices needs careful consideration. Media reports indicate adoption of (gross calorific value) GCV parity as the likely basis, which means that coal of similar GCV from imported or domestic sources shall be priced similarly. This is highly questionable as CIL prices are substantially lower than price of imported coal after adjustment for GCV. Coal prices are deregulated and hence CIL enjoys price advantage. Using GCV parity as the basis shall amount to taking away this advantage without any benefit to CIL. Secondly, while CIL supplies coal from its open cast mines on as mined basis without washing, imported coal is usually washed, which creates a fundamental difference in quality of domestic and imported coal. For any power producer, coal of a particular GCV with variation of +/- 10 per cent is very different from another variety of same GCV with variation of +/-2 per cent. This partly explains the lower price of CIL coal. CIL’s plan to set up numerous washeries is aimed at securing price convergence with imported coal legitimately. It is this initiative of CIL that caught the fancy of institutional investors worldwide leading to unprecedented success of its IPO. Finally, GCV parity shall lead to undue increase in price of domestic coal. Already a few states have raised their voice in this regard.

What is the way forward?

Fortunately, a solution exists that can address the problem of the power producers and also mitigate concerns of the stakeholders. The notified price for higher grades of coal from underground mines of CIL is based on a small discount to import parity price. Being produced only in underground mines the quality of this coal is consistent.

Working out the notified price of imported coal by using the GCV and notified price of these grades as benchmark shall lead to somewhat higher notified prices for imported coal but that will stand to better reason. The rationale would be even better if CIL is allowed to restrict imports to coal of GCV similar to these higher grades.

Would the power producers benefit from price pooling?

Yes. Notifying a price for imported coal by CIL will help the power producer in claiming ‘pass through’ for price variation more easily as is the case with domestic coal. This by itself may allow significant power capacities already set up to generate at much higher capacities in a viable manner. It may also make financial closure and bank financing easier for upcoming power projects.

Undoubtedly, selling imported coal on a notified price by CIL should be implemented at least to the extent of its FSA commitment.

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