Coal India Limited (CIL), the largest coal producer in the world, is struggling to meet its production and offtake targets and the government’s diesel pricing policy seems to be having a direct fallout on the yield of this public sector behemoth. Contractors are walking out because CIL, being contractually bound, is being unable to make good the losses they are accruing from the differential between bulk and retail diesel pricing. Consequently, overburden removal is falling, which would translate into lower coal production as well, S Narsing Rao, former Chairman, Coal India Limited, tells Rakesh Dubey of Coal Insights. Moreover, many power generators, felled by low demand from the discoms, have not been lifting their contracted quantum, adding to CIL’s worries.

Let’s start with the good news. Eastern Coalfields Limited (ECL) is likely to stage a turnaround in 2013-14. How do you feel that two subsidiaries of Coal India Ltd (CIL) have been able to achieve this feat in close succession? 

Only two subsidiaries – ECL and Bharat Coking Coal Ltd (BCCL) – were under the Board for Industrial & Financial Reconstruction (BIFR) and we hope this year (2014-15) ECL can come out of its purview. Anyway…we have started a new year and have huge targets to achieve now. So, let us see if we can meet these. We have a target of 507 million tons (mt) for production and 520 mt in off-take. 

What went wrong in 2013-14 so far as missing the production and off-take targets were concerned? 

Of course, these were difficult targets. About 30 mt of incremental increase was no mean task. I was expecting a growth of 20-25 mt, but we ended up with a growth of only 10 mt. 

We could not achieve the targets due to two major issues. One was the loading problem at Mahanadi Coalfields Limited (MCL) which was created by a particular Member of the Legislative Assembly (MLA) of that area. The problem is persisting. We lost 2-3 mt of production at Talcher on account of this alone. The problems are continuing but have been confined only to two sidings because of bandh and other issues. 

Then again, unfortunately, there were some procedural problems like the environmental clearance at Lakhanpur, which was 3.75 mt and Barakpur about 2-3 mt. So, about 6 mt of production was lost due to issues related to environmental and forestry clearances (around 4 mt because of environmental approvals and about 2 mt because of forestry clearances). 

We initially hoped these clearances would come through but there were some hitches at the last moment. 

Besides MCL, production was also affected at NCL to some extent, where we lost around 3.75 mt because of EC (environmental clearance) issues. 

While these two were avoidable, there were general problems as well. Our production had suffered by around 5 mt in October 2013 due to Cyclone Phailin. Almost the entire production was gone in Odisha and other subsidiaries. In fact, except for NCL, all other subsidiaries were affected by Phailin. 

In addition, there were problems related to quality and demand from the power sector. These are of course operational issues but, overall, production was hit to the extent of 20 mt because of which we could achieve only 10 mt incremental production in 2013-14 as against the targeted 30 mt. 

Let’s see how we progress this year.

What steps are being taken to achieve the target in 2014-15? 

We will definitely work towards achieving them, based on our experience last year. We took a lesson in one aspect, that pending clearances should not be allowed to hang fire till the last moment. We should get the approvals in the first half itself so that the required capacity clearances are in place in the first half of a fiscal. This, unfortunately, did not happen last year and we had to practically stop mining after January 2014 in some of the mines because of non-availability of environmental clearances. 

We had anticipated the clearances to come in but which did not happen. Hence, no mining took place from end-January! In fact, we had to cut down around 19,000 tons of production every day at NCL because of the lack of ECs. 

We already held a meeting with the Ministry of Environment & Forests (MoEF) on April 16 and have set some targets on the clearances this year. 

Then, of course, there were operational issues like contracts.

It is also said that issues related to outsourcing also affected production and that such contracts are heavily biased in favour of CIL? 

Yes. I agree that contract agreements are heavily biased in favour of CIL or the subsidiary companies. It has been like this from the beginning. I am not saying this should be the case, but that is how it is, historically. And we need to bring in changes to make the contracts more balanced. May be, one or two conditions have been changed here and there but we need to change the clauses further. 

A major problem, which affected us marginally last year, but has taken on severe proportions at present, is diesel pricing. The central government has created a major problem for us. Because of the diesel pricing policy, the retail and bulk differential is `10-12 per litre. Till September 2012, there was no concept of retail and bulk pricing but one rate with our contract miners. 

Consequently, whenever there was a price increase, we had to give that incremental price to the contractor but our basis for that was the nearest retail price. Otherwise there would be a 5-10 paise difference from place to place but we needed to have one single price. For instance, in Kolkata, we may have 10-12 locations and the price of each would differ. For that, we may decide that for Kolkata, the price of diesel at say the Netaji Subhash Road pump, which is nearest to CIL, would be the price of diesel. 

This method was being implemented smoothly. However, when the government introduced the bulk pricing mechanism, which was much more than the retail price, the contractors, said we were paying them only the retail equivalent price whereas they were buying diesel at the bulk price. We cannot change the contract and that is a major problem. In fact, some of the small contractors have actually run away. They can’t really afford to lose `10 per litre on diesel cost, which is around `9 per cubic metre and this makes a huge difference. 

Sometime back, it had decreased to `5 per litre and we thought the differential was coming down, but then again it started increasing. Last August, the difference between the retail and bulk rates came down to around `5 per litre but is currently pegged at around `10.75 per litre. I don’t know how I can resolve this problem. We cannot change a contract after awarding it – in that case, it will become a major vigilance issue. 

We know that we are not supposed to buy in the retail market, but how do I modify the contract after awarding it? Secondly, assuming that we take a risk and do that, some of the contractors in that case, can buy in retail – and this cannot be ruled out. That would be another scandal because then that contractor would be making `10 per litre. 

If we change the clause, we have to do it across the board, for all – big and small contractors. I am not saying the large contractors may not take recourse to this move and that the smaller one will do, but the latter category needs relatively smaller quantities of diesel. If we excavate 3.5 million cubic metres of overburden daily, it means our daily consumption of diesel is close to 25 lakh litres a day or 2.5 million litres a day. 

We may have hundreds of contractors and it would not be possible for us to really know who is buying diesel at the bulk or retail rates. If this is indeed happening, it may snowball into an issue tomorrow. But how do I crosscheck? 

We are suffering at South Eastern Coalfields Limited (SECL) at present, as a large contractor simply stopped mining. Our executives requested it to not stop the OB removal by somehow making those contractors understand that CIL will have to meet its production target for 2013-14. But, indeed, this scenario has become difficult. 

We faced problems last year as well. Our managers had somehow been able to convince the contractors to keep working till March 31. However, suddenly, the OB removal level has come down. 

At Northern Coalfields Limited (NCL) too one contractor stopped work, saying he will not resume unless the price was increased, but we cannot increase the price as per rule. Suppose, we do increase the rate by violating rules… but if tomorrow the contractor buys diesel in retail, there will be a scam and there could be allegations that we knowingly allowed the contractors to increase the diesel prices. 

I am very concerned regarding this issue. If we can’t solve it, then it is going to have a serious impact on our production targets this year as well because the contractors will not do the OB removal. A genuine requirement is around 0.9 litre of diesel for every 1 cubic metre of OB removal. Now 0.9 litre means a difference of around `9 per litre. 

Now, if a contractor has an agreement with us at `70-75 per cubic metre of OB removal, he will obviously make some profit. But if he buys diesel in bulk and not from the retail end, he loses `9 per cubic metre which means he is actually also incurring losses. I do not think any contractor will make a profit of `9 per cubic metre of OB removal. 

At SECL and NCL, the contractors have backed out after March 31. Now the question is, why did they continue till March 31? I am sure our GMs had given them some assurances. But now, the major contractors have run away. 

So what is the production scenario at present? 

It is not bad as of now as we are producing around 1.3 million tons of coal per day. We are at around 96 percent of our target at present, but there will be serious implications later. If OB removal is not up to the mark, then coal will not come later on. Even now, coal is not coming because of the slow progress in OB removal due to diesel-related issues. 

Let us see. We are exploring a couple of options like buying diesel departmentally and distributing, but before that we have to check the impact of doing so on taxes etc. 

The matter was discussed at the board level and a couple of options were debated upon but it is feared that there might be the possibility of misuse of departmental buying and distribution to contractors.

Last year, CIL missed its production target by a big margin of 20 mt and the scenario is not that optimistic even now. How do you plan to protect your margins? 

Missing the target in 2013-14 will obviously have an impact on margins. Our production growth too was less than three percent and there has been no price increase during the year. Except for some minor corrections here and there, there has hardly been any increase. So obviously there will be some impact on margins. I should not share the impact right now because it is market-sensitive information and we should not talk about that unless we publish our results. 

But unless there is some volume growth and price revision together… unless there is growth in revenues by 6-7 percent annually, the increasing cost of production cannot be made up. Every employee gets an increment, which is an average three percent and another 10-12 percent comes through DA neutralisation. So, overall employee cost goes up 6-7 percent every year. In addition, there is increase in diesel and explosives costs apart from the inflationary pressure on other spare parts. 

So, the aggregate increase in the cost of production would be 7-8 percent per annum, which can be made up entirely through volume or price increase or partly by both. 

Is it possible to control the fall in margins by e-auctions because the allotment in 2013-14 was quite high, at about 58 mt as against 44 mt in 2012-13? 

The offerings and allotments were higher in 2013-14 because even some power plant consumers had not taken their committed quantity of coal at times and at some locations. So that quantity of coal was offered in the e-auctions. 

Yes, we sold 10 mt more than last year in the e-auctions, but the realisations suffered, because these were market-driven. Our overall realisation is down to around 36-37 percent above the notified price in 2013-14 as against around 50 percent in 2012-13. 

The increase in the notified price in 2013-14 was only for the lower grades of coal. 

But the higher grades are not much in demand in the e-auctions? 

No, that depends on market factors and international prices. Leave aside the percentage, overall, there was decline of about `350-`380 per ton in realisations under e-auctions as compared to the previous year. I think `2,670 per ton was the average realisation in the e-auctions in 2012-13, but this year the average realisations are about `2,200, which is a substantial reduction. 

But that’s the market. There is very little that anyone can do 

In 2012-13, some subsidiaries, ECL for instance, had earned an additional `550-crore or so by selling coal through e-auctions. One of the reasons attributed to this was the restriction on illegal mining in its command areas such as Birbhum and Bankura. But, in 2013-14, there was an increase in illegal mining activities, which caused losses to ECL as its realisations in the e-auctions fell. Though this is related to law and order and is a state subject, is there anything CIL can do or is planning to, to alleviate the situation? 
That’s the impression or feedback I had had from the company – that restrictions were rigid on illegal mining activities in these areas. We had requested the state government to take action and it had also promised to do so but this year again there appears to be a rise in illegal mining in the ECL command area. 

The power sector has been given a particular target to produce electricity and, based on that, it has been given coal linkages. If it generates less, it will obviously buy less coal. How is CIL gearing up to tackle such a scenario? 

Last year, for example, whatever the target or situation, the net result was that coal imports by power utilities which were not located in the coastal regions increased by 7 mt. In 2012-13, their imports were around 30.5 mt and in 2013-14 this increased to around 37.5 mt. This means, they had imported only 7 mt tons of additional coal. That 7 mt of imported coal may be equivalent to 10 mt of domestic coal, which means if we could produce an additional 10 mt in 2013-14, we could have met their entire additional demand. 

The coal-based generation growth last year was around 8.28 percent. If other sectors are not growing, then it is a different issue. Of course 77-78 percent of power generated in the country is coal-based. 

In 2012-13, it was found that power generation companies were not producing as much power as they were supposed to because of low demand from the distribution companies (discoms). What impact will such a scenario have on CIL if they lift less coal because of low generation? 

That’s true and related to market factors and it’s their problem. It will have some impact. Let’s say that all the systems based on location, quality, linkages from one subsidiary to a particular power station, railways circuits and loop systems etc are fairly rigid. For example, Haryana says it does not want to generate power as it is getting the same from other states, because of which it has huge coal stocks and hence does not want to take coal from us. 

My problem is what do I do with the BCCL coal that was supposed to go to Haryana? It is also not exactly a commodity which I can supply to some other entity if the original consumer does not demand it. The systems are fairly rigid. Railways have their own limitations, you can’t blame them because of their routes. There is the issue of coal grades too – one consumer will prefer a poorer grade while another will opt for a higher variety and, because of this, we suffer as well. 

Some plants, as in Gujarat and Rajasthan, have been refusing to take coal for a long time. Even West Bengal had flatly refused to take coal from ECL and BCCL and only wanted the fuel from MCL. In fact, Haryana had not lifted coal for the entire February-March period.

These things impact us because we cannot produce more from the open cast mines. Overall, we did lose substantially, but let us see...

On the off-take side, we could have done better in 2013-14, but there was a problem in the form of Cyclone Phailin and issues related to our consumers. Particularly in SECL, our off-take was affected to the extent of 2-3 mt as Gujarat State Electricity Board did not pick up the coal. What these consumers do is take the coal from us and get it washed and load it. In fact, their washeries lift the coal from us and do the washing. 

In such a scenario, we did not even have a contractor to give this coal to somebody else because it takes 2-3 months to arrange for a contract for an alternative buyer. Even if we put up a contract, we have to call for a tender etc., a time-taking process. 

Because of such refusals, we were losing around 80,000 tons of coal from Gevra field of SECL daily. If someone stops lifting the coal, it has to be given to someone else or kept at some railway siding. These are operational issues. 

The MoEF recently mandated that power plants at a distance of more than 500 km from mines must get washed coal or coal with less than 34 percent ash. Earlier, the norm was more than 1,000 km. What impact will this revised guideline have on CIL?

We are working on that. The 1,000-km norm is there for this year. Next year, it will be reduced to 750 km, and from January 2016, 500 km. We are exploring the options because 40-50 mt of coal, particularly from MCL, goes beyond 1,000 km. MCL will be impacted since it produces low grade coal which is transported across larger distances.

Where the medium term is concerned, we are working on options such as whether part of the coal from BCCL, CCL and ECL can be supplemented which can be diverted to some other locations because it seems the new norms would be aggregated on a quarterly basis. So, some additional high grade coal could be given from these three subsidiaries to such plants.

The new norms also mean that CIL will now have to be serious about setting up washeries?

This will be a problem, particularly at MCL because its volumes are very high and grades very low. The other subsidiaries produce various grades and can manage by supplying some amount of better grades to ensure that 34 percent ash criterion is achieved. But there is no way we can achieve that 34 percent ash target at MCL since that grade is not produced here. The coal here is above 34 percent, at 44-45 percent, with the average at 40-45 percent. We will have a problem especially with the coal going from here to the southern peninsula – Tamil Nadu, Andhra Pradesh etc. Thus, this 40-45 million ton is a problem.

Moreover, one must keep in mind the distance that has to be covered as well so we have to keep the logistics (Railways) in mind too.

One theoretical alternative is to divert some of the higher grades with lower ash percentage yielded at the other subsidiaries for blending with this 40-45 mt.

The other problem is the distance this coal has to travel to the plants. At the end of the day, we will need washeries because this jugglery will not work for too long. MCL is growing by 10-15 mt in production annually.

We have held talks with our customers regarding their priorities where washeries are concerned. But these will take at least 2-3 year to come up.

One is under construction while 2-3 have been awarded in Bhubaneswari etc. It will take some time for them to be fully operational. But we will have to develop up another 20-25 mt of washing capacity.

Today hundred million tons of washing capacity exists at the Korba, Mahanadi and Western Coalfields… such as Aryan, Naresh Kumar etc. Alternatively, we have to work together with the consumers so that they can enter into some arrangements with the existing washeries to get their coal washed following their own procedure till the new washeries come up.

What is the status of your imported coal supply to power plants?

As of now, there is no further development. If we achieve our targets (production and off-take) this year (which I have no reason to say that we will not unless something untoward happens like last year), I don’t really need to import coal.

Last year, our customers had imported around 37 mt. If you really see it as a percentage against 355 mt of total supplies to the power plants, it was about 10 percent. Even if we do import, it would be a mere 3-4 mt against the country’s imports of 75-77 mt.

According to our compilations, India’s coal imports in 2013-14 are estimated at about 181 million tons.

I do not think it would be around that level. The power sector imported about 77 mt in 2013-14. That is, around 37 mt was imported by our customers and 40 mt by the imported coal- based power plants. This is the quantum actually imported by thermal power stations. In addition, some captive players and non-power sector entities may have taken recourse to imports as well.

Your estimates may include coking coal. Even if coking coal imports are pegged at around 35 mt, I wonder if non-coking coal imports would amount to 130-140 mt. I can’t believe it could be at this level.

My assessment is that total coal imports would be around 135 mt of which coking coal is 35 mt and non-coking coal, 100 mt.

I say this because the cement sector’s imports may not be too high since it is taking even lesser volumes of coal from us. It may have imported good quality coal for blending.

According to my estimates, cement production in India would be around 200 mt, for which it may need 34-35 mt of coal. Of this, 8-9 mt is being supplied by Singareni Collieries Company Ltd (SCCL). We supplied around 5.4 mt to cement companies in 2013-14. So the total shortfall is around 20 mt which the cement companies may have plugged in through imports.

In addition, sponge iron companies are passing through a difficult phase and I don’t think they may have imported any significant quantity. In any case they get a certain amount of coal from us, but the sector as a whole is not doing well. Had it been doing so, it indeed would have gone in for imports.

Thus, imports of coal by the entire power sector were at 80 mt in 2013-14. Around 20 mt may have been imported by cement makers and another 5-10 mt by captive power plants etc.

Nowadays, even brick kiln-makers are using imported coal, particularly those units in Punjab.

They may be doing so because our higher grades are priced almost at par with imported coal. They may be using imported coal because of freight and locational advantages. In addition, supplies from NEC may have been less. But so far as the cement sector is concerned I feel it may not have imported more than 20 mt of coal.

Other sectors like steel are using imported coal because of obvious reasons, but I think this 100 mt of steam coal imports is avoidable. Imports of 37 mt of coal in 2013-14 by power plants which are our customers, could have been avoided had we produced more.

What is the status with regard to the appointment of MDOs by CIL?
There is no significant progress in terms of awarding the contracts but I think tenders have been published for 2-3 projects.

What about developing closed and abandoned underground mines through the joint venture (JV) route?

This plan has been shelved long back, because the very concept was unworkable through joint ventures. First, why should any private company work with CIL and how? I don’t think any private entity will form a joint venture with a government company. Assuming that you are allowed to use your coal equivalent to your share in the joint venture, why would a private company agree to work where CIL will have 51 percent stake and a majority on the board?

Secondly, at what price would the JV company sell coal to you? If it sells at a lower price, then people would say CIL is foregoing its interest. If it sells at higher price, then how will the private player benefit? How is that model workable? That is my view. I had said at that time as well that this will not work, but then they published the tender. I do not know what the trigger was for that decision but, not surprisingly, it did not succeed.

Why will anybody invest hundreds of crores of rupees in a project where decisions will be taken by CIL and its subsidiaries?

The share value of CIL is ruling around the `300-level and it had, in fact, not performed as per the movement of the Sensex.

Ultimately, the market is the determinant of the share price. Nobody knows how it moves and nobody knows why the market responds to a particular decision in a particular way. Certainly I am not competent to make any comment on the so-called below-level share price of CIL.

But if you really see the year 2012-13, when we had reported a net profit of `17,500 crore (we reported the figure in May), the share price was around `320. In May 2011, ie, just after publishing the 2010-11 results, when the profit was around `10,500 crore -`11000 crore, the share price was around `411.

When the company reported `10,000-crore plus net profit, the share price was `411 and when the company reported a net profit of `17,500, the share price fell to `320! What can I say? I do not have the technical expertise to comment on this.

However, I feel, the market was totally confused last year. Not confused but, rather, expectant. Once the disinvestment was announced everybody expected CIL would be part of that and then the downward spiral in share prices commenced because everybody expected the government to fix a price lower than the market price by `5-10 for the divestment.

We were thus caught in a vicious cycle. The scrip fell and further selling happened on the assumption that the disinvestment price would be lower. That is why it had gone down to ` 270-`275.

When you compare the share price to the Sensex, you must add `29 to the current valuation because we had given a special dividend of `29 per share.

Overall, I do not want to comment on the stock movement. I may give a justification or paint a rosy picture and either way it would not be correct. The market alone should decide what the price should be and whether it is a correct one or not.

But one thing is clear – the disinvestment rumours, which were rather prolonged, badly affected the share price movement. People were agog – whether it was happening at all or not, how much would be sold – five percent or 15 percent etc. The strike also affected the share price after it had touched a high of around `387 in September 2013.

Will there be any increase in coal prices in the near future considering the fact that margins are likely to be under pressure?

Basically, CIL should not increase prices. But, at the same time, we are answerable to the shareholders.