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Coal India said to cut auctions to divert fuel to power stations

Coal India Ltd has cut the amount of the fuel it’s selling at competitive auctions to bolster supplies to power stations to meet demand, said people familiar with the matter.

The government has asked the state-run monopoly to cut the quantity auctioned to increase coal supplies at power plants, which fetch the company almost half the price of open sales. Spot electronic auction sales in the two months to 31 August dropped 70% to 2.52 million tonnes from the same period a year ago, according to two people, who asked not to be identified as the information isn’t public.

Greater supplies to utilities are critical to Prime Minister Narendra Modi’s goal of accelerating economic growth and providing round-the-clock electricity to every household in the country. The revenue loss from lower auction sales may prompt the company to raise prices, said Giriraj Daga at Mumbai- based Nirmal Bang Equities Pvt. Ltd.

“Everyone is betting on a price hike,” he said. “Even a Rs.50-a-tonne increase will give Coal India the delta to offset lower e-auction sales.”

A.K. Dubey, Coal India’s chairman, and marketing director B.K. Saxena couldn’t be reached at their office phones.

Kolkata-based Coal India sells a part of its output through auctions to customers that don’t have long-term purchase contracts. These sales, which account for about 10% of its production, contributed 40% to the miner’s earnings before interest, tax, depreciation and amortization (Ebitda) in the year to 31 March 2013.

Supply bottlenecks

A surge in economic activity has led to higher demand for the fuel, exacerbating supply bottlenecks caused by heavy rains at some mines and slow railway transport. The national peak shortage in August expanded to 6% from an average 3.5% in July, according to the power ministry.

Coal India has been asked to halve e-auction sales in the year that began 1 April from 58 million tonnes in the previous period to reduce shortages at power plants, Coal and power minister Piyush Goyal told lawmakers in parliament on 6 August.

“While fewer stocks for auctions is leading to a spike in prices, it may not be enough to compensate for the lower volume being sold,” said Viresh Oberoi, managing director of Mjunction Services Ltd, which auctions the commodity.

“There’s a definite risk of a hit to the company’s profitability,” said Prasad Baji, an analyst at Edelweiss Financial Services Ltd in Mumbai. “There’s some room to increase prices, but pressure to keep power prices in check may deter such plans.”

“Maintaining Coal India’s profitability is crucial to the success of a planned 10% share sale by the government,” said Daga. India, which owns 89.65% in the miner, approved a share-sale plan for the company on 10 September.

“A price increase will immediately call for rerating of the stock and this will fetch higher returns for the government during the share sale,” Daga said.

Source: Live Mint