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Wednesday, February 22, 2012

Coal India in a spot over supply to power plants

Wed, Feb22, 2012

Kolkata: Later this month, when Mr Sriprakash Jaiswal will be meeting top officials from the Ministry as well as Coal India to work out the coal supply modalities for next fiscal, following the recent directive of the Prime Minister's Office (PMO), he may find himself in an unenviable situation.

First, he has to ask CIL to make additional supplies of approximately 50 million tonnes of coal in 2012-13 and, reach them to power stations ignoring concerns on the logistics front.
Jigsaw Puzzle

CIL is currently agreement-bound to supply 90 per cent (trigger level) of the 306 million tonnes requirement to 75 power stations in the country which were commissioned before April 2009.

If the company is now forced to sign fuel supply agreements (FSA) with the projects commissioned during the last two years, the total supply commitment will reach approximately 350 mt during the next fiscal.

Assuming that CIL will achieve a modest 5-6 per cent production growth next fiscal, there will still be a shortfall of 25-30 million tonnes.

Theoretically, the shortfall can be managed by restricting supplies to the existing customers to 90 per cent of requirement. Available estimates suggest many in this category are now enjoying 100 per cent or more supplies.
Pithead stock

Shortfall in production can be mitigated by diluting the pit-head stock. CIL ended last fiscal with an inventory of 70 mt and an insider suggests that irrespective of the recent rise in off-take, there may not be any significant dilution in stock by the end of this fiscal.

However, evacuation of this stock, dispersed across mines in five states is not easy, courtesy poor evacuation logistics on the part of Railways. Moreover, there are seasonal impediments - such as restricted working hours in summer and poor road conditions in rainy season – in moving coal from mine to railway sidings.

Poor logistics may also prove to be a huge bottleneck in evacuating the augmented production. Sources suggest, criticised from all corners, CIL has launched a hunt to locate assets which can be brought on stream with immediate effect. However, many such assets (as in Rajmahal) do not enjoy adequate evacuation logistics.

The theoretical possibility of meeting shortfall through imports is also difficult to achieve. Even if power producers now agree to pay CIL for imported coal (which they opposed in the past), CIL is not in a position to solve logistics tangle involved in moving the coal from ports to power plants.

Passing the buck

With logistics set to emerge as spoilsport in moving coal to customers, inviting penalties on CIL; the coal major may plead for keeping safety options open with regard to future FSAs. One logical step in this direction could be making power sector partly or fully responsible for lifting the available coal especially from areas which do not have adequate rail logistics.

Keywords: coal supply, Sriprakash Jaiswal, fuel supply agreements, power projects

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