Coal Insight: 2011-2012

17 Jan 2012

Domestic Coal Market Time line of events occupying center stage in 2011 Jan: CIL cut production target Coal India lowered its production targets downwards as stricter pollution norms had hit its output from almost all its mines. Targets were cut by 20 million tons (MT). Feb: CIL hiked coal prices selectively Coal India hiked domestic coal prices due to lowering down of production output caused by mining restrictions imposed by the environment ministry. Prices of premium grades of coal - A and B - were linked to international prices, and were offered at a 15 percent discount on the global spot prices. While the power utilities, independent power producers (IPPs), fertilizer and defence sectors are being exempted from a straight acrossthe-board increase, a 30% hike in C to F grades became effective for all other sectors who enjoyed marketdriven prices. The increase was done to peg prices with the floor-level of the spot eauction prices of coal. “The floor of spot e-auction prices was 30 per cent above the notified prices.” No cut in import duty on thermal coal Much to the disappointment of power, cement and sponge iron sectors, there was no change is import duty of thermal Coal in budget 2011-12 and was kept same as 10%. The exemption or reduction in import duty on thermal coal was expected by power companies as Cen-

tral Electricity Authority has asked all the power generators to use at least 15 percent imported coal in their total consumption in view of shortage in supply of domestic coal. 5% Excise Coal Duty imposed on

power tariff for both domestic house holds and industries. Power generation cost moved up by Rs 0.40-0.50 per unit and Subsequently, most of power the companies decided to increase its power tariff by a minimum of Rs 0.40-0.50 per unit. May: Coal off-take in e-auctions picked up; production remained low Coal India Ltd (CIL) posted a 12.9% rise in profit for 2010-11 due increased revenue from e-auctions and recent rise in prices. But though the off take increased a bit, production stood at the same level mainly due to factors like not getting environmental clearances and law and order problems in Orissa and Jharkhand. The production for the financial year 2010-2011 stood at 431.3 million tonne (mt) with an increase of just 0.01%. However, the coal off take for the year increased by 2.01% to reach 424.5 mt. June: CIL assured to improve Coal availability Coal India assured the government that it will make efforts to increase coal availability to the users by 28 million tonnes in the current financial year to tide over the shortages. And proposed for e-auction of coking coal as well. However, the power ministry demanded of temporarily stopping spot sales of coal to ensure availability of Coal at power stations. But CIL reacted sharply to the demand and said restricting e-auction sales would rather push up stock piles at its mines and aggravate coal shortage. So, CIL scraped the offer to stop e-auctions.

Clean energy cess was imposed on coal, which was levied and collected as a excise duty of 5% plus cess from coal mines w.e.f. 1st March 2011. MCL hiked prices for F & G grade In the last week of Feb, Mahanadi Coalfields Ltd (MCL), a subsidiary of CIL hiked prices of 'F' and 'G' grades of coal, used in thermal power plants, by 19% and 23% respectively. The price of 'F' grade of coal was revised from Rs 480 to Rs 570 per ton while the price of 'G' grade coal was raised from Rs 350 to Rs 430/ MT Mar: Coal India warned for further hikes in July-Aug Coal India hinted to increase prices once again during July-August after it has negotiated a salary hike. The next round of price hike was likely to cover all sectors including power, fertilizer & defense sector which had been left out last month. These three sectors consume around 80 percent of CIL's coal. April: Hike in Coal prices made Power expensive With coal accounting for nearly twothirds of the cost of power generation of thermal power plants, fresh revision of coal prices made power tariff to rise in most of the states. Andhra Pradesh Electricity Regulatory Authority (APERC) revised the

Contact: E-mail: monica.patnaik@steelmint.com Website: www.steelmint.com

Government also increased the coal dispatches to 180 rakes. it was prepared to load 200 rakes daily.patnaik@steelmint.95 million tonnes in the last two months. reasons being heavy rainfall. CIL.Coal Insight: 2011-2012 17 Jan 2012 July GoM approved 26% profitsharing for coal companies A 10-member Group of Ministers (GoM) headed by Finance Minister Pranab Mukherjee approved the new mining bill which said coal companies will have to share 26% of profit with the local population. which accounts for 80 per cent of domestic coal production in the country. Coal production picked up in Nov but off-take fell Excessive rains and a strike by Coal India workers' union had led to a Contact: E-mail: monica. The gap between indigenous availability of coal and estimated coal demand to be met through imported coal increased over the years from 52. The coal offtake in OctoberNovember fell short of the production by approximately 2 million tonne. however. had missed its revised production target last fiscal too.71 MT in 2008-09 to 150. it got an average of 186 rakes. was not free from its share of worries on transportation front.03 MT in 2011-12. the Coal Ministry agreed to divert 4 million tonnes (mt) of monthly quota through e-auction route to power sector. So.com . the short supply of wagons further hampered CIL’s ability to supply coal to different power stations. the consequent drop in coal production and the most important being the road transportation issue between pitheads to railheads. Sept: Coal loading at South East Central Railways fell in Sept A sharp drop in coal loading was seen in September caused by heavy rains flooding the collieries.com Website: www. 2) The quality of coal sold in the e-auction was also suspected. indicating an accumulation of pit-head stock.steelmint.499 crore due to price increases in February and higher sales through eauction. Dec: Wagon shortage hindered coal supply by CIL Adverse climatic conditions. Out of which 149 rakes were supplied to power sector. recording an output of just 431 MT. Production in Nov had crossed 34 million tonne. Coal production resumed in Andhra Pradesh Coal production at Singareni Collieries in Andhra Pradesh were resumed after more than a month’s close due to 'people's strike' for a separate Telangana state. primarily heavy rainfall in August and September had already affected the supply of Coal to thermal power stations. According to CIL. Coal India's net sales rose by 27% to reach Rs 14. strike and delays in the grant of forestry and environmental clearances to coal projects. Oct: Part of Coal E-auctions was diverted to power projects Shortage of coal led to an acute power crisis in most of the states. So. The primary reason being: 1) Logistical problems: Co al through e-auctions has to be lifted from mine heads & the cost of transporting through road was 5 times higher than Railways' charges. CIL lowered production target to 440 million tonnes Coal India Limited (CIL) lowered its production target for the fiscal year to 440 million tonnes from 453 million tonnes. Higher production. Power companies hesitated to lift coal from e-auctions 50 lakh tonnes of coal offered by CIL in October remained unused as Power utilities hesitated to lift Coal from e-auctions. Aug: CIL’s first quarter earnings moved up Higher e-auction sales and other income powered a 64% growth in Coal India's earnings in the first quarter of FY11. Nov: Rolling mills preferred coal from North-East India over expensive imports Rolling mills based in Central India showed keen interest to buy high grade coal from Assam and Meghalaya on factors like 1) High carbon and low ash coal (FC: 45-50) 2) Cheaper offers than imports from South Africa & Indonesia shortfall in coal production by 17. But instead of 200 rakes. But production bounced back in November. In the first quarter of FY11.

mittee has suggested exempting imported coal from the 5 per cent customs and 5 per cent countervailing duty (CVD). K. the country had been facing coal shortage due to fall in domestic production. Coal Minister Sriprakash Jaiswal had earlier said in the Lok Sabha that the government was considering a proposal to hike royalty rates on coal and lignite production. Government will revise Royalty rates by the end of Jan 2012 "The government will notify revised royalty rates on coal and lignite by January 31. The CEOs are likely to take up with the Prime Minister the issue of “uncertainty” surrounding the power sector due to not only shortage of coal The other important issue likely to figure during the meeting is of imported coal.00 1000. hence. A B C D E F 4000." said a source in the Coal Ministry quoting an official document.00 2000. The Chaturvedi Com- In the last few months. The B.00 3500. Orissa. Chaturvedi committee headed by Planning Commission member (Energy) has been set up to suggest measures to increase coal production and increase its availability to meet the growing needs of the power sector.00 5000.00 3000.00 1500.com .patnaik@steelmint. The major coal-producing states of Jharkhand. 2012. Imports too have gone down dramatically due to a sharp rise in the cost as countries such as Indonesia and Australia have imposed additional duties.com Website: www. Events to look for in 2012 Ministerial meet to discuss on shortage of Coal & exemption of 5% Customs duty Prime Minister Manmohan Singh has convened a meeting with the top power sector officials on January 18 amid rising concerns about continued shortage of coal and gas that has hampered power production and stalled power sector reforms.00 4500.00 6000.Coal Insight: 2011-2012 17 Jan 2012 Domestic Coal Price Trend Monthly Average Winning prices of Coal E-auctions in 2011 6500.00 5500. the fall in prices in the Oct-Dec period is in line with the fall in International prices.steelmint.00 2500.00 Rs/MT Grades Note: * Grade ‘A’ and ‘B’ are priced at the international level. taking the price from $30 to $150 a tonne.00 * Price for Lower grades such as ‘E’ & ‘F’ have remained firm due to short supply. Chhattisgarh and Madhya Pradesh had also requested for the fixation of royalty rates on an ad-valorem basis. Contact: E-mail: monica.

This suggests that production cost of sponge iron will remain high as the other key raw material i.324 > 3. < 4.360 > 1. Cement.940 > 3.400.200 > 2.089 > 3. SCCL to adopt new Coal pricing mechanism in 3 months Singareni Collieries Co Ltd (SCCL). The new system has 17 categories with different price brands. Coal with similar calorific values may have similar price across the mines. So. Secondary players have always purchased it at higher prices in the eauctions.454 > 5. The old pricing system had 7 categories starting from 1300 K Cal to 6200 K Cal .com .865.597. on the other hand. < 5.089.Coal Insight: 2011-2012 17 Jan 2012 CIL’s New Pricing Policy Grades of Non-coking Coal in UHV & GCV CIL decided to shift to GCV pricing method Coal India decided to switch to gross calorific value (GCV) method .steelmint. NTPC Coal India largest consumer expects 50-60% impact on tariff.597 > 4. will be completely switching over to the new price mechanism based on gross calorific value (GCV) in the next three months. Coal India is classifying the seven grades of coal into 17 bands under gross calorific value. The worry was that these bands were very wide and did not offer significantly higher price for washed coal. Fertilizer and Sponge iron industries.200 > 4. those tracking the sector believe that in reality there will be a big Grade A B C D E F G Useful Heat Value (UHV) in (Kcal/Kg) > 6. Under UHV pricing.200. India's second biggest coal miner. The current price hike is likely to impact the primary players more than the secondary players. is linked to the actual calorific value or quality of the coal.000 K Cal. < 5. which would result in some price increases for certain higher-grade coal. < 4. Power. Contact: E-mail: monica. Rise in fuel cost is expected to hike the power tariffs by 50-60 paise a unit in February 2012. < 3. Grade C is expected to witness the highest rise in prices.113. that includes a laboratory for analysis. There will be a discount on coal with high ash content.e. Power sector said tariff would be rise by 40-60% to factor in the price hike.454 > 6.com Website: www. < 6.a globally accepted pricing mechanism for the non-coking coal from the existing useful heat value (UHV) based system with effect from January 1.360. < 6. Though suppliers claim that migration from the UHV to GCV based system will be revenue neutral.600 > 4. A to C grades are considered as superior and are used in Cement. will be ready with 3 months. Steel and Cement Industry said fuel cost is now up by 70%.049 > 5. It is investing about Rs 1 crore to set up the required facility to grade the coal as per its GCV to fix a price tag. GCV-based pricing. the average cost of power is Rs 3-4 a unit.400 Gross Calorific Value (GCV) in (Kcal/Kg) > 6. These will range from 2. The facility. < 3. Impact on Steel sector Industry stakeholders perceive that the new pricing regime will also impact the primary players as the basic prices have been hiked to match with the floor prices of the spot eauction. Currently.600 . Impact on Power sector Power utilities mostly use grade D to G and the move to raise prices will push up the fuel cost for power companies. 2012.940 . Iron ore is also priced high.200 > 5. the primary players who get coal through linkages will have to pay more now.049.324.300. UHV-based pricing is based on empirical formula (which deducts ash and moisture content from the standard formula). < 5. and Steel Industry comes together to oppose Coal India new pricing Coal India’s new pricing system got strong opposition from consumers across the country.patnaik@steelmint. < 6.865 increase in pricing without any value addition.200 Kilo Calories (K Cal) to 7. the coal is categorized into seven grades. < 4. < 2.

83 million tonne i. So. coking coal imports through Kolkata and Haldia was 2. Imports at Visakhapatnam port also dropped by 15.com .patnaik@steelmint. These three eastern Indian ports account for almost 60% of India's coking coal imports.steelmint. And meeting the industry expectations. coking coal prices are likely to stabilize further. India Contact: E-mail: monica. However. buyers still had to pay around 17% more than a year ago i. In April-September period. demand for Australian coal fell . 2011 but falls later Prices of coking coal had surged to above $300/MT . Coal Imports in 2010-2011 Coking Coal Imports fall. In the times to come.e. a major buyer for Coal to look for other sources and it started procuring more coal from Mongolia. prices fell from the level of $300-310 in Q3.Coal Insight: Outlook:2011-2012 2011-2012 16 Jan 2012 17 Jan 2012 Australian Hard Coking Coal Prices International Coal Market Coking Coal peaks in Q2. and currently they are prevailing somewhere between USD 200-220 per tonne. Tata Steel had predicted that coking coal in the October-December quarter will reach the level of $235/MT given by slowing down of steel demand globally.3% and at Paradip. With improved supply. Thermal Coal imports rise India’s Coking coal imports dropped in 20102011 despite of price fall in global markets as costlier dollar and an ailing demand from steel sector squeezed import orders. prices were around $200 per ton for coking coal in the October-December quarter of 2010. Source: resource-net. But now all the companies have resumed normal operations and normal mining activities are going on in Australia.3% for the same period. the decline was 3. However. due to supply restrictions from Australia following flooding of mines and increased demand from China. down by 16% y-o-y.e. higher prices and limited supply made China. from $200 last year. India’s major steel maker.com Website: www. prices have also come down. leading to a softening in prices in Q3 of 2011. Outlook for Coking Coal in 2012 Heavy floods in Australia had disrupted the supply of Coal in late 2010 and early 2011.com India's Coking Coal imports in 2009-2010 SOUTH AFRICA AUSTRALIA 5% 7% INDONESIA USA 2% 1% OTHERS 85% India's Coking Coal imports in 2010-2011 SOUTH AFRICA 82% AUSTRALIA CHINA 9% 1% 1% 4% 1% 2% RUSSIA INDONESIA USA OTHERS Source: Ministry of commerce & Industry.

00 20.Coal Insight: Outlook:2011-2012 2011-2012 16 Jan 2012 17 Jan 2012 India’s Coal imports 90. demand for coke also came down.patnaik@steelmint. Columbia.com . 55% of power in India is generated through thermal coal and India imports a major part of its thermal coal requirements from Indonesia.00 Total imports of Coking Coal declined by 20.com Website: www.00 0. Million Tonnes 60.00 70. steel mills in India operated below their normal capacity because of shortage of iron ore due to restrictions in major producing states like Orissa and Karnataka. later in the year 2011.e. However. This year. i. Mozambique to meet their coal requirements.00 THERMAL COAL COKING COAL OTHER COAL 2009-2010 2010-2011 Thermal Coal Imports rise despite of price hikes Indonesia adopted a New pricing technique to align its rates with international markets under the benchmark prices called the HBA Index. as per certain estimates.00 50. Indian companies must look at countries other than Indonesia such as South Africa.00 30.00 40.00 80. Therefore. India's Thermal Coal Imports in 20092010 64% 35% SOUTH AFRICA INDONESIA 1% Outlook for Thermal Coal in 2012 India's Thermal Coal Imports in 20102011 66% 31% SOUTH AFRICA INDONESIA OTHERS Indonesian government has decided that it will set aside 82 million tonne or one fourth of 2012 production for domestic players. However.00 10. And it will also tighten its grip on coal exports. But the private players can come together to play a better role and improve the infrastructure there for common use. imports from Indonesia remained high in spite of a 30% price rise. Though. South Africa has logistical problems with weak rail transport. a hike of about 30%.10 million tones (mt) to surpass Japan's 65 mt to become the largest importer of Indonesian thermal coal. The new pricing policy took the price of coal above $100 a tonne in 2011. 3% Contact: E-mail: monica.89% per cent year on year. This could cut the thermal coal exports by 120-130 million tonnes. India imports coking coal mainly from Australia to feed its speedily expanding steel industry. India tipped to increase its imports to 84. The rates came down as supply improved from major exporter Australia after the devastating flood there affected production in January.steelmint.

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