Gap between Coal India, foreign coal price narrows

Shrinking disparity promises to soften the impact on users who will buy the fuel through coal price-pooling
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First Published: Mon, Feb 18 2013. 12 59 AM IST
A Barclays Commodities Research report shows that coal prices were around $93 a tonne in 2012, down 24% from $122 a tonne a year earlier. Photo: Brent Lewin/Bloomberg
A Barclays Commodities Research report shows that coal prices were around $93 a tonne in 2012, down 24% from $122 a tonne a year earlier. Photo: Brent Lewin/Bloomberg
Updated: Mon, Feb 18 2013. 01 15 AM IST
Mumbai: Although prices of thermal coal have fallen in overseas markets, Coal India Ltd has held rates steady since the beginning of last year, somewhat narrowing the huge gap between the two.
The shrinking disparity promises to soften the impact on users who will buy the fuel through coal price-pooling, a new policy of averaging out prices of imported and local coal now being shaped.
It also builds the case for those who don’t want Coal India, which accounts for more than 80% of Indian’s coal supply, to raise prices this year, but analysts say there will be a hike nevertheless.
Internationally, prices of thermal coal have fallen owing to shale gas discoveries in the US, a slowing Chinese demand, and an oversupply, particularly in Indonesia. A Barclays Commodities Research report shows that prices were around $93 a tonne in 2012, down 24% from $122 a tonne a year earlier.
In India, the price of imported coal was at Rs.5,000 a tonne (5,800 kilocalorie, Indonesian origin, landed in New Mangalore port) on Friday, down 11% from Rs.5,600 a tonne a year ago, data from resources research firm Oreteam showed.
Coal India’s discounted price, at which it sells the majority of its coal, is Rs.2,800 a tonne for 5,800-6,100 kilocalorie since January 2012.
This makes the gap between the foreign coal price and Coal India’s notified coal price at 79% (imported coal was 79% more expensive than Coal India’s). Last year, the gap was at 100%.
“This is going to help price-pooling. It could also provide some impetus to imported coal-based coastal plants,” Girish Shirodkar, a partner and managing director of Strategic Decisions Group, a management consultant.
To be sure, “all put together, there still remains a substantial gap between imported and domestic prices”, Shirodkar said.
Thermal coal prices are set to fall a little more this year, with Barclays forecasting it at $92 a tonne, which could shrink the gap further.
If Coal India bites the bullet and raises prices to offset the sharp rise in input costs, particularly due to rising diesel prices, it could be the start of a new trend when the state-owned miners prices are no longer heavily discounted.
Coal India sold 50 million tonnes (mt) of coal out of its total production of 435.84 mt via electronic auctions sold at market prices in 2012, and these have been mirroring international prices, analysts said.

Coal pressure

The spotlight is on Coal India’s pricing policy, with chairman Narsing Rao underscoring the pressure on it on rising costs.
Rao told reporters in Kolkata last week after announcing third-quarter earnings that every rise of Rs.1 in diesel prices would raise the company’s mining cost by Rs.120 crore.
Rao did not answer phone calls or reply to questions sent to him by text message and email asking if at any point this year or next year Coal India would consider raising coal prices.
Analysts said there was a strong chance it will do so.
“Coal India may raise prices by 3.5% to offset the cost pressures, mainly on account of diesel prices,” said Chirag Shah, director at Barclays Securities (India) Pvt. Ltd, without saying when it is likely.
Strategic Decisions’ Shirodkar said he expected inflation-linked price hikes by Coal India every year, starting with an approximate 8-10% rise in the next financial year starting 1 April.
“They may make their users from the non-controlled markets (where selling prices are market determined such as aluminium and steel sectors) pay the full market price,” Shirodkar said.
But any proposal to raise the price may be met by headwinds in Coal India’s board, conscious of maintaining the company’s image as a good corporate citizen, placing social responsibility high on its priority.
“When coal prices are falling internationally, why should Coal India increase its prices?” asked a board member on the condition of anonymity. This person said the company did not consider any proposal to rise prices at its board meeting on Wednesday.
“When every commodity price is increasing, it is commendable that Coal India has managed to make a 9% jump in its net profit (October-December) even without raising coal prices,” the board member said.
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First Published: Mon, Feb 18 2013. 12 59 AM IST
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