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Government push to slash premium coal prices may force Eastern Coalfields, Bharat Coking Coal into losses

The government wants Coal IndiaBSE -1.03 % to cut prices of premium grades of coal but company executives fear this will force subsidiaries Eastern Coalfields and Bharat Coking Coal into making losses. They produce the bulk of the state-owned company's premium coal and have only recently managed to turn around after ailing for several years.

Eastern Coalfields produces premium thermal coal used in electricity generation while Bharat Coking Coal mostly produces premium coking coal used in the metallurgical industry. "Internationally, coal is sold on the basis of the energy it holds irrespective of its overall quality. Thus, consumers pay the same price for the energy part in coal either for inferior grades or premium grades. The price varies because the lower quality contains lower quantum of energy while the higher quality contains higher quantum of energy. This is not the case with either Eastern Coalfields or with Bharat Coking Coal," said a senior Coal India executive.

At Eastern Coalfields, the price of energy that consumers pay for lower quality coal is at a deep discount while the price of energy they pay for higher grade coal is only a shade more than the cost of extraction.

This results in the consumers wanting to pick up lower quality coal from the company because the inherent energy price is much less.

However, higher grade coal is primarily from underground mines where the cost of extraction is higher. The company made a loss of Rs 2,600 crore on this variety last year.

At current prices, it remains a lossmaking proposition. The loss is just about made good by the price of coal extracted from open-cast mines where cost of extraction is less.

"Now, if prices of higher grades are reduced, we would start making losses on the entire range of coal we sell. However, if Coal India irons out the difference in energy prices in lowgrade and high-grade coal, Eastern Coalfields could balance the loss from higher grades with increased income from lower grades," a senior Coal India executive said.

"If the difference in energy price within coal is to be ironed out, the hike in prices of lower variety would have to be a steep one which might not be accepted by consumers," he said. "In 2014-15, Eastern Coalfields produced around 20 million tonnes of higher grades of coal, which constitutes almost 50 per cent of its total coal production. Thus, 50 per cent of its coal is sold at deep discounts while the rest is sold at a price which barely covers the production cost," he added.

Another Coal India executive said: "We have been doing a tightrope walk and any tweak without taking care of the entire array of our products will lead to losses for the company that has come out of BIFR [Board for Industrial and Financial Reconstruction] in 2013 and barely managed to wipe off years of accumulated losses upwards of Rs 10,000 crore."

The situation is more or less the same at Bharat Coking Coalfields. There's a big discount on lower-quality coal while the higher quality fuel is slightly costlier, hence lowering prices of the first will lead to losses.

sources: http://economictimes.indiatimes.com