Coal India Ltd's Production Not Enough To Sustain India Coal Demand – Part Two

Continued from Part One.

India’s Coal Minister Prakash Jayaswal recently informed the lower house of the parliament (Lok Sabha) that there is a wide gap between the availability of coal and the commitments made by CIL through fuel supply agreements (FSAs) and letters of assurance (LOAs) for supply of coal.

Coal India Ltd. Can’t Deliver

Reports suggest that CIL, accounting for over 81 percent of India’s coal production, has missed its revised production target as it produced only 435.84 million metric tons of coal in fiscal 2011-12 against the target of 447 million metric tons. CIL has already missed the target in 2010-11 with the production inching up only 0.2 percent over a year before, touching 431 million metric tons.

CIL cited various reasons for the downward revision in the production target, such as heavy rainfall, strikes and delays in gaining forestry grants and environmental clearances to coal projects.

CIL had earlier asked the government to scale down its production target for the 2011-12 to 448 million tons, fearing it would not be able to make up for the slippage in output in the first half of the fiscal year. However, the Planning Commission is likely to set a coal production target of 574.4 million tons for 2012-13.

Meanwhile, CIL is under huge pressure to supply the fuel to domestic power producers because back on April 3, the government issued a presidential directive to CIL that will make it mandatory for the company to supply a minimum level of fuel to thermal power projects.

Earlier this year in February, the Prime Minister’s Office (PMO) had asked CIL to sign such agreements after a meeting with private-sector power producers in January. The PMO had given CIL a deadline of March 31, 2012, to sign these agreements for the power projects commissioned before December 2011. In case CIL failed to meet the 80 percent of committed coal supply, it would be penalized.

But CIL’s board members rejected the prime minister’s directive to sign the agreements, saying the penalty clause under such contracts was too stringent. After the presidential directive, however, CIL was forced to sign the fuel supply agreements with power producers.

CIL Not Out Of The Woods

This decision has created another controversy. One of its minority shareholders, British hedge fund Children’s Investment Fund, has alleged that directing the public sector coal giant to sign fuel supply pacts with power producers would amount to “direct transfer” of $19 billion to the private sector.

According to a PTI report, the fund has initiated legal proceedings against CIL, charging it with selling coal at a price that’s up to 70 percent below the market price, hurting minority shareholders.

According to the fund, the coal prices should be linked to market rates as it would bolster the profitability of Coal India Ltd.

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  • The investment into alternative power generating technologies such as nuclear energy may need to be measured against the potential cost when things turn against you as unfortunately happened this year  in Japan. Coal prices and coal statistics show developing economies are more likely to increase their investment into & their use of coal mining in coming years because of coal’s affordability and ability to quickly meet increasing demands for electricity and steel.


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