Coal India's revised pricing system to hit industrial sectors

Coal India, the world’s largest coal miner has moved away from UHV (Useful Heat Value) based coal pricing to GCV (Gross Calorific Value) based pricing. The company is yet to announce the prices on its website, and hence, the exact nature of the new pricing system is as yet unknown. After a period of 3 months, Coal India officials will meet again for further price adjustment.

Currently, domestic coal is priced on the basis of UHV, which considers the residual heat value in the coal. GCV, on the other hand, considers the actual energy released during the combustion of coal, and is accepted by all major coal-producing countries.

The new pricing system will have 17 categories with different price brands. These will range from 2,200 Kilo Calories (K Cal) to 7,000 K Cal. There will be incremental prices for the 17 new categories, which will differ by 300 K Cal. The old pricing system had 7 categories starting from 1300 K Cal to 6200 K Cal.

                                                                 Various Grades Of Coal - As Per UHV Pricing

                                                                                       Source: Coal India Website

Currently, Grades ‘A’ and ‘B’ are priced at the international level, and hence, they will not see much change in the prices. According to media reports, Grades ‘C’, ‘D’ and ‘E’ will undergo major changes. This is the grade of the coal being used by the power utilities, and thus, will have some negative impact on them despite Coal India continuing to offer discounts of 77% to the power sector.

In our opinion, the power utilities will not be able to pass on the prices, and will have to absorb the losses. This will stress their margins. However, the operations of companies having captive coal mines will not be impacted by the new pricing norms.

Coal India is responsible for nearly 85% of the country's coal production, and has major customers from sectors like power, steel, fertilisers, paper, cement, etc. Besides, it also has other small customers from sectors like glass, chemicals, engineering, etc. Looking at the wide range of customers from various industries, we at DSIJ, are of the opinion that GCV-based pricing will have some impact on these industrial sectors. For example, the paper industry has already seen a drop in its margins due to high prices of pulp. Typically, about 10%-12% of their total cost is associated with coal, and with the rise in coal prices, paper companies will see a further drop in their margins.

Given the situation, the only gainer that we see is Coal India, which will see higher realisations. The company has faced a fall in production of about 20 Million Tonnes (MT) this year due adverse monsoon conditions. However, it is gearing up production this year after the Coal Ministry asked it to meet the yearly volume target of 447 MT. For the next year, the company has set a target of 464 MT, and is hopeful of achieving the same. It is in talks with the Ministry of Environment & Forests to get the necessary clearances. Given the dominant position of Coal India, our readers should start adding it to their portfolio.