Kolkata: In a first, Coal India Ltd (CIL) may scale back production to cope with mounting inventory. Due to a lower offtake and higher production, the company may have to cut prices or even production to clear existing stock, Union power and coal minister Piyush Goyal said on Thursday.
The minister said the situation is such that CIL cannot stock any more coal and is struggling to see how it can sell more coal quickly in order to liquidate the unsold pithead stock of 40 million tonnes.
On the sidelines of an event organized by the Indian Chamber of Commerce (ICC), Goyal said that he has asked CIL chairman Sutirtha Bhattacharya to explore all options to clear the mounting stock. However, he said the ministry cannot micromanage pricing, and the company has to take a call on its own. “All I asked them is to get out the stock," Goyal said.
This marks a surprising reversal of strategy after production growth was pursued via the past few quarters even without commensurate acceleration in sales.
Bhattacharya said a proactive marketing plan is being worked out for expediting coal sales by the marketing department.
Neither price cut nor a reduction in production is necessary, said a key CIL official, asking not to be identified. Both can have “far-reaching unfavourable implications" for the company’s profitability, he added. CIL should alternatively start supplies to all power generating companies, even ones without firm power purchase agreements (PPAs), the official said. “By restricting supplies only to those with PPAs, the demand is being artificially restricted resulting in an artificial coal surplus," he added.
“Going by what the minister said, if there is excess coal, why not the full quantity (100%) be restored under the letter of assurance (LoA) by Coal India," said a power producer.
The power producer accepted that there is tepid demand for coal from power utilities but said CIL supplies only 75% under LoA. He said the reason for not doing so is because it is unsure of fulfilling supply commitments once demand for power picks up. Besides, in the case of projects that have achieved commercial operation date and require coal, CIL should sign fuel supply agreements with them, he advised, adding that those companies have been asking for coal for the past one-and-a-half years.
According to an industry expert, CIL has told its subsidiaries to identify customers whose FSAs have been fulfilled and who are prepared to take more coal. It has asked them to find ways and means to dispose of coal stocks.
Provisional data provided by Coal India to stock exchanges on 1 January 2016 shows that coal production between April to December 2015 was around 373.45 million tonnes, a growth of 9.1%. Offtake during the first nine months of the fiscal year was 389.29 million tonnes, a growth of 9.8%. Coal India has a production target of 550 million tonnes this year.
A potential decline in the company’s profitability will have implications for the government’s plans to sell Coal India’s shares to bridge the budget deficit. The government has approved an offer for sale of 10% of its stake in the firm.
According to an analyst who did not wish to be named, the minister’s announcement was contrary to what they were expecting, a 3-4% increase in price every year. He said that piling of stock was due to a slump in demand from power producers who are not producing enough because of mounting losses. “It is like penalising the one who is doing the right thing," the analyst said, adding that Coal India has improved both its production and offtake in the past few months.