Coal Glut

CIL cuts back production in the wake of low offtake

As the government gears up to achieve the 1 billion tonne coal production target by 2020, the country’s largest coal mining company, Coal India Limited (CIL), faces a new challenge –  coal stock pile-up. Faced with the problem of plenty, the company was forced to cut back coal production and offtake recently. Its output registered a decline of 3.4 per cent in April 2016 as compared to the same month in the previous year, while offtake fell by 2.5 per cent due to lower demand by power plants.

Reasons for coal pile-up

There has been a remarkable improvement in CIL’s performance following the introduction of comprehensive reforms. Between April and December 2015, the company registered a growth of 9.1 per cent and 9.8 per cent in production and offtake respectively as compared to the same period in the previous year.

However, during the last quarter of 2015-16, production began to subside as the actual offtake started plummeting. This was primarily due to lower offtake by the power sector, which accounts for around 78 per cent of CIL’s offtake. As a result of low demand from the debt-ridden discoms, the coal inventories of thermal power plants (TPPs) were at an all-time high. As of March 31, 2016, TPPs had a 27-day average coal inventory, aggregating about 39 million tonnes (mt). Of this, around 36 mt was indigenous coal. No TPPs were in the critical or supercritical category. During April 2016, CIL’s supply to the power sector declined by 6.8 per cent as compared to April 2015. Moreover, CIL had about 58 mt of stockpile at its own mines as of end-March 2016. During the last quarter of 2015-16, the actual offtake was about 4 per cent less than the targeted offtake.

Concerned about the stockpiling creating stock management problems (including deterioration in the quality of the piled-up coal and the risk of spontaneous combustion), the company undertook a production cut. As a result, during April 2016, CIL achieved only 90 per cent of its production target (44.48 mt), producing 40.09 mt. In comparison, in March 2016, it overachieved its target of 58.73 mt, by producing 59.19 mt.

Stock liquidation measures

In order to improve its stock liquidation, CIL has been working on a number of strategies. One of these has been the special e-auctions held for both the power and non-power sectors. During March 2016, it offered around 14 mt under a special e-auction to both the power and non-power sectors. In an attempt to attract bids for higher volumes, the company resorted to changes in its pricing strategy for the e-auctions. For instance, Western Coalfields Limited, a subsidiary of CIL, decided to peg the reserve price at 20 per cent less than the notified price as opposed to pegging it 20 per cent higher than the notified price of coal.

Meanwhile, in April 2016, CIL’s board approved performance incentives for supplying higher grades of coal (G5 and above) in the model fuel supply agreements (FSAs) for both the power and non-power sectors so as to improve offtake, particularly for higher coal grades.

In addition, CIL launched a coal allocation and monitoring system to allow consumers to book their coal volumes directly. Small- and medium-sized enterprises  with annual fuel requirements of up 4,200 tonnes but without FSAs have been allowed to source coal through either agencies or CIL. Around 8 mt of coal has been earmarked for this.

Earlier, coal that could not be supplied due to the failure of the railways was considered as delivered. Further, if the level of coal lifting by the consumer was less than 30 per cent of the contracted volumes, FSAs were terminated. However, these two clauses have now been removed and consumers can lift coal any time during their contract period, which has been increased from one year to two years.

Other initiatives that are being taken by CIL include coal supply under the “as is where is” scheme for the power sector, wherein coal can be lifted by consumers through their own logistics, and additional coal supply against the import component.

The way ahead

Coal offtake has still not picked up momentum. During April-May 2016, offtake grew by an abysmal 1 per cent over the corresponding period in the previous year.

To further liquidate coal stocks, CIL has notified that it will undertake the e-auction of about 79 mt of coal for the power and non-power sectors between August 2016 and March 2017. In addition, the government is exploring potential export markets like Bangladesh to offload surplus coal.

However, the National Coal Distribution Policy [NCDP], 2007 could be a major bottleneck in the liquidation process, which does not allow CIL to supply coal without an FSA. Going forward, the government might have to bring about amendments in the NCDP to reflect the new coal supply dynamics that have emerged in the country.

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