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Imported coal price crash makes Railways stare at reduced earnings

A massive crash in imported coal prices to below $65 a tonne in December is on course to heavily damage Indian Railways’ earnings.

Prices of Indonesian coal are now lower than the same grade of domestic coal. As a result, imports of thermal coal, used mainly for power plants, which has risen a massive 17.5 per cent from April to November, is expected to shoot up even more.

The railway earnings from coal freight are the same as it gets from its entire passenger traffic business. So, as the price of Indonesian coal touched $64.65 (Rs 3,879) per tonne in December it has alarmed Rail Bhawan. A similar grade of Indian coal at the mines now costs Rs 4,340 per tonne. Indonesian coal accounts for 70 per cent of India’s import of the mineral and even accounting for shipping and insurance charges the rates are very competitive.

While the lower price of imported coal will help the economics of power plants that run on them lined along the Indian coasts, the Railways face a daunting problem. It expects to earn Rs 44,597 crore from coal freight traffic in 2014-15, just Rs 100 crore less than its total passenger traffic earnings of Rs 44,645 crore. In seven months till October the railways have earned Rs 25,516 crore or 57 per cent of the total.

This means even in the normal course over the next five months the Railways would have had to shore up its coal freight movement. But with the pressure from Indonesian coal, this will be an even bigger challenge.

A Crisil report pointed out that the pace of robust imports is likely to continue. “Core imports expanded for a seventh consecutive month in November. Prior to this, core imports had been falling consecutively since May 2012 (except a few months). Sustained growth in core imports in the past few months suggests that a nascent recovery in domestic demand may have begun”.

While an Aditya Birla Money Equity Research report also noted that “businesses which are energy intensive, would benefit from lower coal and diesel prices”, the forecast for railways is not cheerful. The report estimates that the downward trend for international coal prices are here to stay. The problem for the Railways is that the dip in overseas coal prices has happened despite initial expectations that prices would climb as India shuttered 214 mines, following the adverse Supreme Court verdict.

Former Coal India chairman Partha Bhattacharya, however, took an optimistic note on domestic coal movement. According to him, contracting a tonne of imported coal takes time unlike oil as the market is restricted and so the importers may not be able to take advantage of the soft prices.

Coal Consumers Association of India chief G Jayaraman said for inland consumers the cost advantage of soft international prices doesn’t work.

Source: The Financial Express