INDIA: Coal cost for non-core, cement sector would increase significantly: ICRA

ICRA believes the coal cost of companies in non-core sectors including sponge iron and cement industries would increase significantly in future under the revised pricing mechanism for non-coking (NC) coal of Coal India (CIL) that has been implemented with effect from Jan. 1, 2012. The operating costs of companies in energy intensive industries like primary aluminium are also likely to increase, since many of them have coal-based captive power plants, the fuel cost of which would rise under the new system. However, Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, ICRA stated ``given the coal shortage scenario that has been prevailing in the country in recent years, many non-core players were dependent anyway on costlier coal procured from e-auction and/or imports, and the overall impact of the revised coal price on their cost of operations would be limited to that extent.`` The impact on the power sector, which uses primarily the E and F grade coal, is expected to be mixed, depending upon the grade of coal a company was buying earlier and also the colliery it was procuring the coal from.

Coal India (CIL) has migrated to a new system for pricing its NC coal on the basis of Gross Calorific Value (GCV) w.e.f. from Jan. 1, 2012. Till Dec. 2011, the company used to follow the Useful Heat Value (UHV) based method to price its NC coal. The revised mechanism is more in line with the international system as against the previous mechanism, which was an old method and depended on moisture and ash content through the application of an empirical formula. The revised pricing system has divided the entire spectrum of GCVs into 17 bands, from 2200 kilo calorie per Kg (KCal/Kg) to 7000 KCal/Kg and above, in intervals of 300 KCal/Kg, as against 7 grades (A to G, from 3,200 KCal/Kg to 6,400 KCal/Kg and above) that had existed under the previous UHV based pricing system. Additionally, CIL has brought in a uniformity in the pricing of NC coal produced at different mines of different subsidiaries, as against the earlier practice of subsidiary-wise and mine-wise differential prices. Only coal produced by Eastern Coalfields (ECL) would command a 6% higher price over the rates notified for others.

Commenting on the impact on the industry, Roy mentioned, ``Since CIL has a near monopoly position in the domestic coal market, with a market share of around 80%, the new prices would be applicable to almost all NC coal consumers in the country.” The migration to the GCV based system would lead to different price increases for different grades of coal, and therefore the impact on various companies` coal costs would also be different. In the absence of adequate data at this stage on CIL`s product mix across the new GCV bands, it is difficult to arrive at the exact impact on various coal consumers. CIL is currently in the process of ascertaining the GCVs of its coal produced from different collieries. Despite the possibilities of substantial price hikes for some coal consumers, the possibility of grade slippages remains following the completion of the GCV estimation process, in which case the extent of price rise for a particular coal mine would be moderated to an extent. A clearer picture would only emerge once CIL comes out with the results of the exercise. ICRA would continue to monitor further developments in this regard and evaluate its impact on the profitability of major coal consuming industries.