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Coal India plans to step up output by 50%

In a bid to protect its revenue stream and maintain margins while fulfilling its obligations to supply higher level of coal to the power sector under the new fuel supply agreement (FSA), Coal India is opting for an aggressive strategy to step up output. The focus will be on increasing the supply of washed coal to the consumers by commanding a premium pricing. The company, which is producing about 22 million tonne of washed coal at present, expects to take up production to about 300 mt or over 50% of its total coal production by over next few years. With a realisation of almost 50% more than existing price of coal, sale of washed coal is expected to help the company take its annual topline growth to 40-50% starting from 2013-14.

“The current price of coal sold by CIL in the market is at deep discount to prices prevailing globally. Sale of washed coal will change this as the company would be able to realise better pricing for its products. It would also aid consumers as they will get good quality coal that will help them to improve efficiency of their plants,” said a senior official associated with the functioning and decision making activity of CIL.

CIL sells coal to consumers in the steel, power and cement sectors under a regulated pricing regime. The price of CIL coal, depending on the grade, is often 50-60% cheaper than similar quality of fuel available in the international market. With CIL finding it difficult to link its coal prices to international level, increased sale of washed coal is considered the right strategy to grow.

The average cost of CIL coal is roughly $25 a tonne. By washing the coal, 20% of coal value to the tune of $5 a tonne is lost. Another $2-3 a tonne is needed for washing coal. This takes the total cost of washed coal (equivalent to 5,000 Kcal Indonesian coal) to $32 per tonne.

The international price of the same quality coal is currently running at over $55 a tonne. “So even if we sell this coal at a discount of 15%, we can gain about 50% in terms of realisation,” the official quoted earlier said.

CIL reported a net profit of Rs 14,788 crore in 2012 fiscal, which is almost a seven-time jump from its net profit of Rs 2078 crore in 2009 fiscal. The gross sales of the company have also grown 30% to Rs 78,410 crore in 2012 fiscal. The growth in sales is expected to be maintained at the existing levels for the next couple of years before zooming further by 2013-14, by when incremental amount of washed coal starts rolling out from CIL’s washeries.

Out of its total production of over 435.84 mt of coal in 2011-12, CIL currently washes a meagre 40 mt per annum through 17 washeries. Out of this, 12 are coking coal washeries (mainly used by steel consumers and not a significant consumer for CIL) with a total capacity of 22.18 mt and five are non-coking coal washeries with a total capacity 17.22 mt ((mainly used by the power sector that uses almost 75% of CIL’s total production).

This is planned for an increase to 300 mt of total coal produced by CIL by 2016-17. The company plans to set up 20 washeries in the next few years to increase the availability of washed coal for its non-pithead consumers to 111 mt in first phase.

“Increase in use of washed coal will not only help reduce pollution level but also result in saving transportation cost and improvement in steel and power plant performance thus leading to economic gain,” said an official in the coal ministry.

While coal prices in the country were de-regulated in 2000, it continues to be fixed by government-owned companies under the guidance of the coal ministry. The domestic coal prices, therefore, are 50-60% cheaper than internationally available coal.

Though the demand for coal in the country is growing, CIL has not been able to revise coal prices for a long time. It raised coal price early this by shifting to a new pricing mechanism based on gross calorific value of coal (GCV), but withdrew the hike after protest from consumers. It has recently raised the price of coal by 10-15% from select blocks moving to GCV methodology.

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