CIL Struggles to Meet Coal Supply Commitments

BRISBANE, Australia - Aug. 27, 2013 - PRLog -- While Coal India laboured to fulfil its coal supply contracts to the thermal power plant sector in the first quarter of the Indian Financial Year to June 30, achieving only 87.8% of its commitment versus 91.5% for the entire IFY 2012-13, the stock position at most power plants is positive. This is a vastly different story than a year ago when for extended periods more than a quarter of the 90 or so power plants monitored by the Central Electricity Authority (CEA) had super critical stock levels of less than four days’ supply.

Minister of State for Coal, Shri Pratik Prakash Bapu Patil told the Upper House of India’s Parliament, the Rajya Sabha, on August 5 that 65 thermal power plants were currently carrying coal stocks equivalent to more than 15 days’ requirements and a number of power plants were instituting measures to prevent a further build-up of stock. According to CEA data, on August 6 only four thermal power plants had super critical stock levels.

Monsoon rains have allowed for more hydro-electricity to be generated, thus reducing the need for coal fired generation and allowed for stock levels at power plants to increase. There is also less electricity demand during the monsoon season. On the other hand, the monsoon rains tend to restrict coal production and add to the transportation problems.

The current high stock levels at power plants may be an indication that power companies have bolstered their requirements under the FSA/MOUs in order to obtain adequate supply of domestic coal without the need to source additional higher priced imported coal.

Under the FSA/MOUs, CIL is required to supply 90% of Annual Contract Quantity (ACQ) to thermal power plants commissioned before March 31, 2009 and 80% of ACQ for power plants commissioned after March 31, 2009. The coal company faces stiff penalties if doesn’t meet at least 80% of a power plant requirements.

However, CIL only need to supply 65% of the FSA commitment using domestic coal with the remainder made up of imported coal. CIL can price these coal imports using a “cost plus” model whereby the customer pays taxes, insurance and a 2% surcharge on top of the cost of the imported coal which is often 50% higher than the domestically produced product.

The present positive stock position of India’s thermal power plant sector is likely to be temporary with CIL and other coal producers unable to keep up with India’s burgeoning coal demand.

CIL held a pre-tender meeting with state-owned traders such as MMTC and STC this week to discuss the supply of imported coal to its power plant customers and is likely to issue its first import tender for IFY2013-14 for an initial 5mt, Reuters reports.

However, the final decision on the import tender quantity will depend on firm orders from customers who will be required to pay for the coal in advance. With the Indian Rupee continuing to weaken against the US dollar and with the possibility of the spot price of coal falling further, power companies are likely to draw down on stocks before to turn to imported coal for replenishment.

The price of Indonesia’s sub-bituminous material, particularly 4,200kc GAR which is the main grade sought by Indian buyers, has been more resilient than higher grades of coal. But if China’s demand for Indonesia’s sub-bituminous coal continues to fall, the price is expected to follow. CIL is estimated to need 8mt of imported coal in IFY 2013-14 to meet 80% of its supply obligations to power plants. However, the current import policy of the government also allows for power companies to import coal for their own requirements on the payment of applicable import duty without the need to go through CIL.

India’s thermal power sector is estimated to need 548mt of coal during the current fiscal year, with 377mt expected to come from CIL’s domestic production, 36mt from Singareni Collieries Company (SCCL) and 28mt from captive coal blocks. Imported coal is expected to fill the remaining requirement.

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