Coal India, the producer with no experience in importing supplies

The country's largest domestic supplier has been appointed a quasi-canalising agency for sourcing overseas supplies

One of the quirky elements of the coal supply crisis is that the government has nominated a company with no experience of importing coal as a sort of canalising agency to import for government- and private-owned power generation companies. This is state-owned Coal India Ltd (CIL), the world’s largest producer and monopoly domestic supplier.

It is unclear why the coal ministry decided that it would not be useful to rope in specialised state-run importers such as MMTC. An email to MMTC did not elicit a reply. Instead CIL, with no experience of importing coal, has raised three import tenders, importing from mostly India-based entities that the eventual consumers could have bought from directly since coal is on the Open General Licence list. 

The coal ministry has claimed that CIL’s canalising will keep import prices down. CIL in a response to Business Standard has, however, said: “The international coal traders would be of Indian origin or if part of an international consortium, CIL shall deal only with the India registered partner.” Such an arrangement gives CIL little bargaining power. 

CIL held pre-bid meetings with the importers where it was decided to narrow the time window for bid price validity from 90 to 60 days. The first of its three tenders is for 2.41 million tonnes to be supplied immediately. There are two “on-tap tenders” of 3 million tonnes each to keep supplies ready abroad if there is flare up in demand in the Indian market.  For instance, supplies tend to dwindle in the monsoon when the coal mines, mostly open cast, are flooded. This is what happened last year, creating a crisis in September. 

Since early this year, the problem has become acute; average daily demand touched 205 GW in the first quarter of FY23, a 14 per cent jump year-on-year. Power Minister R K Singh recently said he sees this as a secular jump in power demand which will not recede. This creates huge pressure on CIL since production has not grown commensurately, even in FY22 when it went all out to raise output (see table). 

So the shortage seems here to stay. But though CIL is not equipped to handle imports, throughout June, the company pivoted around to organise itself to do so. It has set up, for the very first time, a new import-oriented unit under its marketing and sales division at its Kolkata head office. It admitted that “import of coal is not CIL’s core activity” but argued that “the company has been importing heavy earth moving equipment and mining machinery for the past several years and the modality is similar”. The comparison is not apt, since the latter are not meant to be resold. Meanwhile, CIL found out it did not even have the requisite documentation to arrange imports and had to ask NTPC, which has been importing coal for the past few years, to provide them.

Two more reasons make CIL’s import story curious. First, CIL has a subsidiary called Coal Videsh. This entity was set up in 2006 to acquire coal mines abroad and diversify into chemicals and fertiliser, but has done little so far. It is part of CIL’s International Cooperation Division but has played no role in the current round of coal imports. At one stage there were plans to expand Coal Videsh’s equity base with participation from state-owned steel companies SAIL and RINL. That never came through. CIL experts say that if coal imports become a distinct line of business, Coal Videsh might be repurposed for that. 

The second curious aspect is that exactly two years ago, CIL’s marketing department, which is spearheading imports now, was tasked with spreading import substitution in the domestic market. To this end, some 14 public notices were issued to companies in sponge iron, cement and captive power to goad them to substitute imported coal with domestic supplies from CIL.

Though Covid-19 subdued demand, many analysts predicted a huge rebound in energy demand when the pandemic ended. Despite being India’s largest coal mining company and one of the top three globally, CIL lacked the internal forecasting capacity to track these developments. So any change in the demand and supply chain for the fuel catches it unawares.

To be fair, CIL has acknowledged coal import is uncharted terrain and has swung into action within a week of receiving indents from 26 thermal power companies – 19 state-run, seven private. “CIL finalised and floated the tender on a war footing,” a source said.

So where is CIL importing from? “The current short-term tender for import of coal, for Q2 of FY23, is source agnostic. This means the coal can be sourced from any country,” a CIL source said. But the importing firms that showed up at the pre-bid meetings were largely Indian enterprises, such as Adani Enterprises, Mohit Minerals and Chettinad Logistics. 

A CIL internal assessment shows that each consignment of 3 million tonnes of coal imports at current prices will cost it about Rs 3,850 crore. Under the terms, “from the date of placing the indents, delivery of coal would be made within 30 days at the free-on-rail destination of the power plants that seek coal.” 

For such doorstep delivery, the company runs an exchange risk since it will buy in dollars and sell in rupees. In a response CIL said the risks are taken care of, since it would be dealing with the India-registered partner. But the bid documents do not indicate who bears the exchange risks. 

CIL has not taken any hedging for the imports, relying instead on the strength of its balance sheet. The company says it will “ensure that its bottom line would not be adversely impacted out of this initiative”. For the shareholders of CIL this is a call they will have to take at face value. The company’s non-government shareholding is 33.87 per cent, of which foreign portfolio investors account for 6.94 per cent. In the last week of June, CIL had a market cap of $14.54 billion. Whether the numbers would hold up if CIL becomes a coal trading company as well would be worth watching.