Coal India to Fall Short of Production Target as Demand Falls

Operating plants are sourcing coal through the open market outside of fuel supply agreements like e-auction, import, etc.

April 01--MUMBAI -- Coal India Ltd, the world's largest coal miner, will end the year to 31 March with a production shortfall of around 17 million tonnes (mt), chairman and managing director S. Narsing Rao said.

He put down the reasons to muted demand for the fuel and the unwillingness of state electricity boards (SEBs) to buy enough power.

Although output increased, the state-owned firm mined around 465 mt of the 482 mt production targeted for 2013-14. To put this in perspective, this was the amount of coal to be procured just by NTPC Ltd, India's largest power generation utility, in the fiscal year.

"One of the reasons why the production target has not been met is because there is no demand for coal. A lot of states are not offtaking coal because of low demand for electricity. Some of the states such as Haryana didn't want any supplies for February and March," Rao said. "There are huge amounts of stocks at the coal mines."

SEBs are not in a financial position to buy enough power despite the fact that the period of elections usually sees a peak in demand for electricity.

Lok Sabha elections are scheduled to run from 7 April to 12 May.

Coal India has been criticized for its inability to meet domestic demand.

The power sector is the biggest consumer of coal, absorbing 78% of local production. In the earlier part of the financial year, India reeled under a chronic fuel shortage that hurt power generation, causing distribution firms to ration supply to industrial and household consumers in several parts of the country.

India's bid to boost coal production has become bogged down in delayed and more stringent environmental approval processes.

The process by which mines are allotted is also being questioned after allegations of preferential treatment and corruption, including during the period when Prime Minister Manmohan Singh was also coal minister.

India's power deficit has come down to 4.3% in 2013-14 from 8.8% in 2012-13, according to Central Electricity Authority, the country's apex power sector planning body, but the data doesn't capture the real demand. The lowering of deficit is due to the unwillingness of the state boards to buy enough power.

"Except for some power projects in Tamil Nadu, Andhra Pradesh and Karnataka due to logistical reasons, there is huge amount of coal stocks across the country," Rao said.

In 2012-13, Coal India mined 452 mt against a production target of 464 mt. Of an offtake target of 492 mt for 2013-14, around 475 mt was met. It failed to meet production targets in the preceding fiscal years as well, although output did increase.

Analysts support Rao's position.

Coal "availability has improved for domestic power producers", UBS Global Equity Research said in a 25 March report. But, it added, "Coal India does not have enough buyers in some cases, as customers -- especially SEBs -- are buying less coal."

Of India's current capacity of 237,743 MW, around 59%, or 140723.39 MW, is fuelled by coal. The production target for Coal India has been fixed at 507 mt for 2014-15.

The government also proposed a bailout plan for coal-fired power projects by allowing power generation utilities to import coal on their own or through Coal India and pass on the extra cost as tariff increases to help restart stalled power projects.

With the financial viability of power plants fuelled by Coal India being hit because the miner has been unable to meet the promised demand, the government mandated the firm to sign fuel supply pacts with power companies and meet at least 80% of the domestic demand for the mineral from the power sector.

"Although the presidential directive to sign FSAs (fuel supply agreements) with projects having a letter of assurance from Coal India is reassuring, the lack of adequate penal provisions in the agreement deters suppliers to maintain the committed quality and quantity. This has resulted in operating plants sourcing coal through open market outside of FSAs -- like e-auction, open tender, imported coal, resulting in a significant increase in the cost of power generation," India Ratings and Research Pvt. Ltd wrote in a 13 February report.

Coal demand in India is expected to grow from 649 mt a year now to 730 mt a year in 2016-17, with the projected local availability being only 550 mt per year. Coal requirement is estimated to be around 850 mtpa by the end of the 13th five-year plan (2017-22), with availability being limited.

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