There is no denial of the fact that Coal India Ltd (CIL), the country’s largest coal producer, has played a vital role in averting the looming power crisis that India was staring at by restoring the inventory levels at the power plants.
With gradual improvement in supplies, coal stock at power plants having linkage contracts have increased to 18.84 mn t as on 7 Dec’21 and which would last for 10 days, marking a remarkable progress from the period when the inventory had fallen to a mere four days of usage.
However, keeping in mind the peak summer season next year, there is strong prevailing demand for restocking which would keep domestic supplies under pressure and impact CIL’s sales going forward.
Coal production grew but at a slower pace
The company has maintained higher production and off-take volume this fiscal, but the same fell short as it stretched to cater to the elevated power demand. This probably has been a reason for the acute shortage faced by the power plants.
On its part, CIL has dispatched 421.1 mn t of coal during Apr-Nov’21, up 18% y-o-y compared to 357.1 mn t in Apr-Nov’20. However, similar growth was not seen in the production levels, which grew 6% y-o-y to 353.4 mn t.
CIL performance trend during Apr-Nov
Quantity in mn t
Interestingly, coal dispatches in Apr-Nov’21 were 19% higher than the corresponding production attained in the period, which indicates significant dispatch growth compared to the past fiscals.
The company tends to liquidate excess inventory at its pit-head mines towards the first half, and gradually scales up production in the second half of every fiscal.
But, lower production has compelled the company to continue its dependence on inventories to fulfil the requirement. Notably, coal dispatches of 56.78 mn t in Nov’21 was again higher than the production of 53.8 mn t for the month.
Production volume is expected to improve gradually in the ensuing months of FY’22, but most of it would be utilised for dispatches rather than to replenish its pit-head inventories.
Risk of lower offering via auction route
As a result of higher dispatches, CIL’s own inventory assessed at the pit-head mines has declined to a new low of 32.19 mn t at the end of Nov’21. The last time such levels were seen was in end-Jan’20 – when the inventory was recorded at 32.36 mn t.
The company had curtailed its coal offerings via auctions during Sep-Oct’21, but made a sensational return during Nov’21.
Nevertheless, offerings for auction sales are expected to remain subdued especially from the subsidiaries which are facing low stock levels.
In the first eight months of FY’22 (Apr-Nov’21), CIL has offered a total of 124.88 mn t of coal, down 51% y-o-y from 255.79 mn t in the corresponding period of FY’21.
Further downside would impact the company’s revenues which were boosted by higher bid premium received from the sales on the back of strong demand.
Non-power sector awaits normal supply
Although the power plants have been pulled out of criticality, that came at the expense of the non-power sector whose supplies are still being regulated.
In absolute terms, supply to the non-power sector saw an improvement of 10% m-o-m to 9.14 mn t in Nov’21 against 8.33 mn t in Oct’21. However, its share in the overall coal supply volume in Nov’21 came down to 16%, from 22% in Apr’21 as the bulk was diverted to the power plants.
Priotisation to the power sector was seen for auction sales too. Notably, almost 58% of the total volume in Nov’21 was offered under the special forward scheme which is earmarked for the power producers.
Going forward, preference for the power sector is expected to continue in order to ensure uninterrupted electricity supply.
Outlook
Propelled by strong demand coming from the power as well as non-power sectors, CIL is on course to registering its highest-ever dispatches this fiscal, and the volume could also surpass the annual production for the first time since FY19.
The company has set a target of 680 mn t coal dispatches for FY’22, whereas the target for production is 640 mn t.
This indicates that the company would require to dispatch coal in the range of 65 mn t in each of the last four months of FY’22 (Dec’21-Mar’22), which is particularly high compared to the average dispatches of 52 mn t seen during Apr-Nov’21.
Considering the fact that coal supply by CIL is not commensurate with the requirements of power plants, the government has even directed power producers to augment coal sourcing via imports to avoid a coal crunch similar to that witnessed this year.
Although elevated coal prices in the global market pose a challenge for imports, with improved domestic supplies in China, there is expectation of price corrections. In that case, Indian coal imports would once again see a rise in the near-term and dependency on domestic coal would reduce to a certain extent.
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