Demand Uncertainty Weighing on Coal Production

In a stark mismatch, demand for coal in India is not in sync with the total production. While production is going northwards, demand is traversing southwards – making the ambitious coal production target of the government questionable. Although, GoI claims that there is enough demand for coal in the country, but the off-take scenario indicates otherwise.

The latest production and sales figures of Coal India Limited (CIL) for the Apr-Oct’16 period indicate that the coal mining major is not likely to achieve its sales target of FY17. Cumulative sales of the state-run miner in Oct’16 went down to 43.04 mnt from 44.41 mnt in the corresponding month of last fiscal. Exhibiting a similar trend, CIL sold 292.16 mnt during the first seven months of the current fiscal, lower than 295.8 mnt sold during the same period of the previous fiscal.

Examining the off-take sector-wise, it has been found that power sector purchases during Apr-Oct’16, at 216.5 mnt, trailed about 3.7% behind 225.1 mnt off-take during Apr-Oct’15. CIL’s total sales during Apr-Oct’16 period at 31.6 mnt also fell behind sales of 34.5 mnt during Apr-Oct’15. Akin to the power sector, purchases by the cement sector also were remarkably low as cement producers’ preferred pet coke over coal.

During the period under review, not only did sales of CIL lag, but Singareni Collieries Company Limited (SCCL), a company jointly owned by the Union and Telangana government, was unable to outdo its previous year’s sales. SCCL’s sales stood at 26.9 mnt during Apr-Oct’15 and at 26.6 mnt during Apr-Oct’16.

In a recent seminar in Kolkata, the former coal secretary, Anil Swarup, said that the low demand for power, and hence the low demand for coal has arisen due to power distribution companies reeling under financial constraints. The distribution companies are unable to buy additional power, restricting power production, which in turn is retarding coal demand.

To relieve the country’s power distribution companies from financial stress, the GoI has issued Ujwal Discom Assurance Yojana (UDAY) bondsamounting to INR 1000 billion. The UDAY scheme is expected to play a major role in turning around the distribution companies, enabling them to purchase more power, hence taking up power production and push up demand for coal in the country.

Nevertheless, the GoI has maintained its stance to increase domestic coal production. For FY17, the production target is set at 724.71 mnt. At the same time, the ambitious target of producing 1 billion tonne of coal in the country by FY20 has also remained firm.

Continuing its efforts to increase coal production in the country, the GoI has been expediting environmental and forest clearances from the Ministry of Environment, Forest & Climate Change; pursuing with state governments for faster land acquisitions; and coordinating with the railways for uninterrupted movement of coal cargoes. CIL and its subsidiaries have taken steps for raising their respective production by adopting the latest technologies, such as Continuous Miners, Selective Mining, Surface Miners & Clean Coal Technologies, and Coal Sizing & Sampling Technologies. In addition to this, new projects are being undertaken and on-going projects with growth potential are being identified continuously for increasing the domestic coal production.

Build-up of surplus coal stocks due to the incremental production in the country had led CIL to explore export options. The coal major had initially zeroed in on Bangladesh due to proximity. However, the Bangladesh government recently made it clear that it did not consider importing coal from India, but was interested in importing from South Africa.

So, the question arises – Are the efforts of the government to increase coal production justified, given the uncertainty in demand upswing?

Source: Steel 360 Magazine Jan’16 Issue