Column: Coal, in the black

Written by Indronil Roychowdhury | Updated: Nov 1 2009, 02:27am hrs
Just when Indian industry has gone into an overdrive to optimise costs, a number of sectors are surely going to feel the pinch of the 11% increase in coal prices. Even then, Indian coal prices are among the lowest in the world. But coal still remains a government-controlled sector and Coal India Ltd (CIL) controls more than 95% of the Indian coal market.

The government always compelled CIL to sell coal at low prices, with the main aim being able to provide cheap power to both industrial and domestic users. But when it allows coal prices to go up, it gives an implicit clearance to the power sector to seek an increase in power tariffs, too. Not surprisingly, as soon as the coal ministry announced the hike, power producers began lobbying with the concerned electricity regulatory authorities for an upward revision of tariffs. For the Indian thermal power sector that consumes 175 tonne of coal for every mw of power produced, an 11% increase in the price of coal implies an incremental expenditure of Rs 77 per tonne of coal consumption with down the line power production cost going up by 5 paise per unit. Power producers will definitely try to pass it on to consumers.

If big power consumers, mostly in the metal sectorthink steel, aluminium, copperhave to pay higher tariffs, their process of cost optimisation goes for a toss.

But CIL, too, has its compulsons. It couldnt have afforded to put its balance sheet under pressure, which was already bearing the impact of the national coal wage agreement and officers salary revision to the tune of Rs 4,000 crore annually. Besides, its just got navaratna status and couldnt risk turning into a loss-making company suddenly.

So, for CIL, the price increase was necessary, and importantly, its likely to help two of its BIFR companiesEastern Coal Fields Ltd and Bharat Coking Coal Ltdturn black. By allowing CIL to charge 15% more for all grades of ECL and BCCL coalas opposed to 10% for coal from five other subsidiariesthe ministry has enabled both to turn into profit- making units this year.

Ideally, the government should have revised coal prices a couple of months into the meltdown. That would have helped industries across sectors to factor in the hike. Instead, it gave priority to political considerations.