CIL volumes in August was hit by heavy rainfall in key mining areas. However, we see a few positives: e-auction premiums have stabilised; power plant stocks are down 27% since March; there are signs of pet coke and import substitution. We expect coal demand to improve in second half, which should ease off-take concerns and also support better e-auction coal prices.
August volumes affected by heavy rains
CIL’s production declined 10.4% y-o-y (1.3% YTD FY17) and off-take dipped 9.6% in August (0.2% YTD FY17). Production and off-take declined across most subsidiaries (MCL – 8.3% y-o-y, SECL -10.7% y-o-y). Weak demand from power sector and other end-use sector also contributed to weak offtake in August. Coal-based power generation is seasonally weak during monsoon (higher hydel generation), but this should improve in 2H, in our view. We currently forecast production growth of 7.3% y-o-y and off-take growth of 7.6% y-o-y in FY17.
Better E-auction premiums
E-auction premiums over notified price for spot e-auction was 18.8% in July (16.5% in June) as per ICMW data. Blended e-auction realisation was down 9% MoM (Rs 1,481/ton), but this was mainly due to changes in subsidiary mix. We believe e-auction coal demand and prices have bottomed out and could improve post monsoon. Pet coke substitution eroded demand for e-auction coal last year, but with pet coke prices rallying sharply, we are seeing increasing signs of cement producers switching back to thermal coal. The recent increase in global coal prices should also support better e-auction coal demand and prices.
YTD coal imports down 10%
Thermal coal imports declined 10% MoM (month-over-month) in August as per provisional ICMW data. We believe higher global coal prices, rationalisation of high grade coal prices by CILshould lead to higher import substitution going forward. Around 28% of coal imports last year was by imported coal based power utilities, which would remain sticky. Domestic coal-based power utilities using imported coal for blending accounted for 25% of imports while captive power/other non power users accounted for remaining 47% of imports. We believe domestic coal could partly substitute these. In fact, off-take of higher grade domestic coal has improved in last two months.
Auction of coal linkages for captive power plants was at average 8% premium
CIL recently concluded auction of coal linkages for captive power plants. Around 18m/tonne of coal offered for auction was booked. This is in contrast to weak response seen in coal linkage auction for power and cement sectors. We estimate weighted avg. pricing was around Rs 1,085/tonne but at a discount to e-auction prices. Supply under these contracts would kick in H2. We believe impact on blended realisation would be muted.