KOLKATA (miningweekly.com) – Falling international coal prices may prompt Coal India Limited (CIL) to tweak the supply side of e-auctions as a means to ensure higher sales realisations.
According to a senior CIL official, declining international coal prices and easy availability of supply have sharply narrowed the price differential between imported coal and price realisations from domestic auctions.
Under the circumstances, CIL would need to adjust the supply side by possibly reducing the volumes on offer at the e-auctions for higher sales realisations and margins.
This would be in sharp contrast to CIL’s endeavour up to now to maximise sales volumes through auctions, as the latter yielded higher prices, compared with domestic administered prices set by the government through the Coal Ministry.
The CIL official conceded that reducing the coal volumes on offer through e-auction would be an elaborate process but would result in a more “market driven price discovery mechanism”.
He said a detailed market survey of demand and availability at pitheads would need to be conducted as demand–supply dynamics differed across mines, impacting the price discovery mechanism during e-auctions held at the pitheads.
Nonetheless, checking the supplies going to auction was imperative to protect margins, considering CIL’s rising costs amid a depressed international environment, the oversupply of imports and the resultant pressures on prices and margins.
Margin protection would be a priority in view of the expected rise in CIL’s wage bill, in 2017, when a new wage agreement was concluded with employees. The company’s wage bill, which represented about 50% of CIL’s cost of production, was expected to increase by 30%.
As per an internal pricing matrix compiled by the miner, the landed cost of imported coal translated to around 90% of the cost of domestic coal, with current international prices of coal averaging $50/t to $55/t.
Another 10% fall in international prices would bring imported coal on par with CIL’s domestic coal price, the official said.
The Indian government last month directed CIL to supply fuel to thermal power plants, with an aggregate generating capacity of 10 000 MW, but which were unable to start production owing to a lack of fuel supplies.
However, CIL had sought a government directive for these thermal plants to source their fuel requirements through e-auctions, which would ramp up auction demand and prices.
Similarly, thermal power plants receiving coal supplies through negotiated prices under fuel supply agreements, or those with captive mines, would be able to source their shortfall in coal supplies by participating in CIL auctions.
CIL sold the bulk of its production to the thermal power sector at a “notified price” set by the government.
Some coal was also sold to other sectors, such as steel and cement, at a negotiated price. Prices were generally 30% to 40% higher than the notified price.
Further, small volumes of coal were put up for sale through e-auction for participation and offtake by any class of users.