Underground Coal production is turning out to be a drag for the world’s largest producer, Coal India Limited (CIL) for the period of FY13.

CIL produced 37.78 MnT from underground mines in FY13, during the same period cost of Coal production from underground mines was at around INR 4,866/MT, while average cost of total production (underground and open cast) was INR 1,121/MT, According to estimates by the SES, a corporate governance research and advisory firm.

However, average realization from sales of Coal was about INR1,470/MT. Hence, under- recovery for underground mines is about INR 3,396/MT. Therefore, loss from underground mines is estimated at 128.3 billion. Productivity from underground mines, is very low compared to open cast ones. Capital cost per ton for underground mines is also much higher than open cast mine.

“It is a fact that production from underground mines is costlier due to various factors. Some mines are legacy which CIL inherited when the company was formed some 40-years ago. We do not differentiate between the Coals produced from underground mines or open cast mines – Coal is sold on the basis of the energy content in them,” said a senior CIL official, to media.

The research firm has concluded that if CIL produce only from open cast mines, its production will be lower by 10 per cent but its gross profit would have been higher by almost 50 per cent. However, it is not possible to redeploy a large part of its manpower employed in underground mines to other open cast mines.

CIL also embarked on the concept of Cost Plus Mines. Mines that are not viable economically are being taken up for these schemes where consumers pay a price that covers the cost of production and also includes certain margin. At present there are about 7 Cost Plus Mines in Western Coalfileds, a CIL subsidiary.

The cost-plus price is charged by WCL for each project. Other Public Sector Undertakings (PSUs) are getting Coal from WCL at a notified price. Notified price is the price announced by CIL for all its mines. Cost-plus price is higher than the notified price.

MahaGenco Argues for WCL’s Cost Plus Pricing

State-run Maharashtra State Power Generation Company (MahaGenco) has made a strong case for altering the formula to price Coal supplied by WCL.

MahaGenco gets 50 per cent of its Coal from WCL. However, WCL is insisting that it be paid ‘Cost Plus Price’. Cost-plus prices in general were 44 per cent higher than notified prices. In view of WCL’s move to switch step by step to cost-plus price from the notified price of annual contracted quantity (ACQ).

“WCL supplied 25.4 per cent cost-plus during April-Nov in FY 13. MahaGenco had borne the additional financial burden of USD 2.27 billion during the same period owing to the supply of Coal on cost-plus price” the official said.

MahaGenco, with a thermal capacity of 8,000 Mw, procures 50 MnT of Coal annually, of which 22.7 to 24 MnT is procured from WCL.