Home / Markets / Mark To Market /  The coal maker sitting pretty on tight supply and high prices

Shares of Coal India Ltd have gained more than 35% since 1 September, returning to pre-covid levels. This is partly due to the broad optimism in the equity market, but investors also note an improvement in outlook for the company.

A strong rebound in thermal power demand during the current fiscal has been fuelling demand for coal. The surge in coal prices coupled with the company’s efforts to raise production has meant that earnings prospects are upbeat. The company’s production and dispatches for September remained reasonably strong despite being impacted by monsoon.

Dispatches were up 3.6% year-on-year for the month and 20.6% year-on-year for the April-September period. Excess inventories that Coal India had at the start of the year have also reduced. The demand for coal is expected to remain strong because coal stockpiles at power plants have declined significantly (almost 73% over the past year), according to analysts.

Favourable uptick
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Favourable uptick

This left nearly 121 gigawatts (GW) of generation capacity with stockpiles of a week or less during the second half of September. Coal stockpiles have plunged to the lowest in nearly three years, point out analysts at Antique Stock Broking Ltd. Limited supplies and rising prices of other energy sources such as natural gas are expected to keep coal demand robust.

With strong power sector demand, e-auction premiums are also expected to move up. Coal India had fetched about 10% premium on notified prices during the June quarter (Q1FY22). But the rise in e-auction premium was 30% in just the month of August.

Part of this is due to rising international coal prices. Globally, the price of coal has surged owing to an increase in natural gas prices and tight coal supplies in China. Coal futures have already touched $240 a tonne, with gains of more than 170% during the year. The increase in global coal prices will not only support Coal India’s e-auction prices but will also curtail cheap coal imports into the country.

As such, the firm has been attempting to replace imported coal volumes from its own supplies to drive growth. Also, Coal India has been contemplating raising the prices for coal being supplied under the fuel supply agreement. Rising coal prices can support its case. Price hikes are essential if Coal India has to offset the expected rise in its wage bill.

Analysts at Antique Stock Broking note that the wage hike, which is due from July this year, is likely to cost the firm 10,000 crore. To limit the impact on margin, the company will need a price hike of 14% or a higher proportion of e-auction with premiums. The higher proportion of more profitable e-auctions can compensate if fuel supply agreement price hikes are less.

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