Photo: Bloomberg

Photo: Bloomberg

Coal ministry considers royalty share

Coal ministry considers royalty share

New Delhi: The coal ministry is considering a change in a forthcoming legislation that could lead to an increase in the price of the fuel for end users.

The change relates to the way benefits are to be passed on to the local community by miners such as Coal India Ltd (CIL) and Singareni Collieries Co. Ltd, which sell the commodity in the open market.

Photo: Bloomberg

The coal ministry is of the opinion that a royalty share could be passed on to users, leaving profit intact, one of the two officials said.

“If companies are asked to share 26% profit, it directly impacts their bottom line," this official said. Royalties, on the other hand, were “pass through".

Both officials said such a move was unlikely to alter the money that the communities would get.

The Union cabinet approved the draft Mines and Minerals (Development and Regulation) Bill on 30 September. While it stipulated a 26% profit share for coal mining companies, non-coal miners are required to share royalties.

A group of ministers approved the draft Bill in its current form on 7 July. The original version had sought a 26% profit share for non-coal miners as well.

Following this, in October, the coal ministry had written to the finance and mines ministries, suggesting that captive coal miners also be asked to share profit along the same lines as companies selling the fuel in the open market.

Integrated steel, cement and power plants typically own captive coal mines that supply them the commodity for their own purposes. These companies do not sell coal in the open market.

To be sure, these captive miners already share royalty on coal with the government.

On 12 October, Business Standard newspaper had reported that the coal ministry had proposed that a flat per tonne levy be imposed on captive miners. The news report had said that at the current level of profit, the levy worked out to 65 per tonne of coal produced.

A coal ministry official said the idea was to bring about parity in how captive coal miners and firms selling coal in the open market are made to share their revenue under the new regime.

Since the domestic price of coal was much less than the prevailing international price, firms had enough headroom to pass on any increase to the end user, said the first official cited above.

Arvind Mahajan, partner (advisory services) at audit and consulting firm KPMG India, agreed. He said that international prices are more than twice the domestic rates.

He, however, said that the actual increase, at least in case of the power sector, could be mitigated by coal miners, in almost all cases, having bid for or signed power purchase agreements, keeping the cost of coal fixed.

“If a royalty-based model does come about in the future, power purchase agreements could be based on a variable price of coal," Mahajan added.

CIL, which supplies four-fifths of domestic coal, is already in the process of shifting to a new pricing formula from January. On 14 November, N.C. Jha, chairman and managing director of CIL, had said a new system that benchmarks coal on a gross calorific value basis would be implemented in phases from 1 January. Currently, coal is classified and priced on the basis of useful heat value.

While the prevailing international spot price for thermal coal hovers in the $110-120 (Rs5,655-6,170) per tonne range, coking coal costs around $250 per tonne.

Domestic spot rates are about Rs2,400 per tonne. CIL sells thermal coal at Rs1,200-1,400 per tonne, while non-thermal coal is sold at a 30% premium.