Coal India needs to raise prices, but caught between political constraints

The state-owned miner needs to raise prices but it is caught between the political constraints on its major buyer, electricity producers and close decision-making control by the coal and power

Last month, Coal India (CIL) Chairman Pramod Agrawal made a case for raising the price of domestic coal, unchanged since 2018. Though he has good reason to argue for the rise, he will probably not be involved when the final decision is made, either way. He will not be the first one.

To test the waters, CIL’s sister concern, Singareni Collieries Company Limited (SCCL), raised by Rs 100 per tonne the price of all types of coal it sells, with effect from April 1. But this is minor. Compared to Indonesian Kalimantan coal ruling at $178 per tonne, CIL and SCCL prices are far lower at $40 per tonne.

This modest price rise must be juxtaposed against CIL’s record FY23 production to offer a sense of the paradox in India’s coal economy. Since the price of electricity, which accounts for 74 per cent of CIL’s production, is mostly fixed on political considerations, CIL has to sell coal at rack rates. But the miner’s impressive performance in FY23 has led to demands for improving on it, but without providing it the cash support needed to make the necessary investment. That support, then, can only come from a higher price for the coal it mines.

But that is a difficult question since for all practical purposes, CIL’s role and by extension that of the coal ministry has been relegated to only that of mining. The allocation principles including ordering of railway rakes, at least to the power sector, is now handled by the power ministry. As an example, at the end of March, this ministry held a meeting “regarding fair distribution of available domestic coal”. It decided on the state-wise requirement of rail rakes for transport of coal and advised the coal ministry to “allocate rakes for coal supply from CIL and SCCL” accordingly.

In this environment, policy continuity at the company could be a casualty. Agrawal will soon move out of the CIL corner room when his term ends in June. The list of candidates for the post are being finalised, with at least two IAS officers in the fray.

Coal economy watchers will not be surprised that a change in the corner room has little connection with the fortunes of the company that caters to nearly 85 per cent of India’s coal needs. CIL has had four chairmen in the past decade (Agrawal is the fifth). In this period the company with seven mining subsidiaries could not inch past a 3.6 per cent annual rate of growth in production since FY11, and has suddenly logged a 13 per cent rise over 622.6 million tonnes (MT) in FY22.

CIL produced 703.2 MT coal in FY23, reaching 100 per cent of the target set by the coal ministry for the year. To put it in context, the 81 MT of additional supply in one year is about the same as the total rise achieved by CIL in seven years. This is phenomenal. Pleased with the achievement, the coal ministry has asked the company to keep up the same run rate, i.e., add another 80 MT in FY24.

To bring in that order of additional production, the company and SCCL will need additional investment. In addition, CIL agreed to a 19 per cent wage rise this year that has raised annual costs to over Rs 46,000 crore. The company’s free cash flow at Rs 6,277.52 crore (as of March 2022) had just risen by the same 19 per cent, year on year.

CIL is not alone in demanding a price hike. Miners across the world feel the cost pressure. Because of these rising costs, primarily because of lack of adequate investment, prices of all fossil fuels have shot up across the world — oil, gas and coal. In India, too, the Centre has acceded to the demand to raise gas prices.

But domestic coal prices, except for those in e-auction (which account for less than 10 per cent of CIL production) are determined by larger political interests. In a pre-election year, the government will be careful about raising the price of a mineral that can feed into inflation pressures quickly. No wonder, an increasingly assertive power ministry is not in favour of the prices going up. The officials of two ministries have held consultations under the overarching structure set up by the cabinet secretary.

The coal economy, by any reckoning, is too complex a venture in India to be run by a company or just by one ministry. Wiser after the double coal supply shock of calendar year 2021 (April and September), the coal ministry last year sent out instructions to all the chiefs of CIL subsidiaries not to slacken production in the summer months. The company has a typical production pattern. After recording a high in March, production slackens in the summer. The pace worsens as the monsoons strike, making the open-cast mines almost impossible to operate and inundating some of the underground mines, too. Production rises once the water recedes, through the winter months.

To preclude this cycle, this year, too, the coal ministry has sent out senior officials to key CIL subsidiaries, including Mahanadi Coalfields Limited and South Eastern Coalfields Limited, which account for 51.2 per cent of the group’s total production. They are monitoring monthly production, linkages with the railways and so on. Each of these companies, for the record, have a chairman-cum-managing director, who one would expect, is supposed to do these things. “With increasing production and adequate coal stock of 69 MT at our pitheads, we aim to meet the projected target with our best shot and satiate the demand,” said a senior executive of CIL.

Or take the example of imports that CIL was asked to undertake last year. The power ministry demanded that the company allow no shortage at the thermal power plants and so CIL, with no experience, decided to become an importer. It set up a back-up contract with Indonesian miners to import 6 MT coal. It was not needed but the board room of CIL spent weeks firming up those contracts.

The extensive control by the coal and the power ministries on the coal economy is not an aberration in the energy economy globally. European governments now control gas prices, both retail and wholesale, decide to reopen coal mines, and have clawed back from power exchanges the ability to decide on electricity prices.

Given these circumstances, the coal and the power ministries could profitably be merged. It would lead to an integrated policy environment for coal. Already the power ministry website hosts a daily coal report, giving granular details of stocks of each plant. The coal ministry website, by comparison, offers monthly data of the total coal off-take.

Growth pangs

·       CIL produced 703.2 MT in FY23 and reached target; 13% growth over FY22

·       Supply to the power sector was 586.6 MT

·       Production planned for FY24: 780 MT; planned supply for power sector: 610 MT

·       Coal stock as on April 1, 2023, stood at 125 MT, the highest ever (of this 34.6 MT is at thermal power plants)