Sunday, August 16, 2009

Coal India Plans A Price Hike Of 11%

. Sunday, August 16, 2009

By stockOzone team

In a move that may impress investors ahead of its maiden public sale of shares but add to the costs of cement, power and steel companies, India’s largest coal miner has proposed an 11% increase in coal prices.

State-run Coal India Ltd, or CIL, argues its price hike will have only a marginal impact on inflation.

The price increase will net CIL an additional revenue of Rs4,629 crore and boost profits ahead of a public offer in the stock market.

“We see a price correction shortly and there should not be a problem,” said Partha S. Bhattacharyya, chairman of CIL. The company posted a profit of Rs300 crore on a turnover of Rs46,000 crore last year.

The weightage of coal in the Wholesale Price Index, or WPI, is 1.753%.

With the state-run CIL mining 84% of the coal produced in the country, an 11% increase will push up inflation by around 0.16%, the company said.

On 7 August, Mint had reported on the Union government plan to shortly approve a CIL proposal to increase the price of coal, a move that will directly affect cement, power and steel companies.

CIL is a holding firm under the coal ministry that contributes 85% of India’s coal output and is free to fix the price at which it sells the fuel, but only after prior approval from the government. The last coal price revision was in December 2007 and the latest revision is expected to partly bridge the price gap with international coal, which is about one-third higher.

Shriprakash Jaiswal, minister of state (independent charge) in the ministry of coal, did not respond to repeated phone calls and a message to his cellphone.

Any increase in prices of coal, a key input for most sectors, will have a cascading effect.

It will increase the price for coal to the power sector by Rs77 per tonne, which will work out to around 5 paise per unit of power generated; for the cement sector, the impact will be around Rs20 per tonne which will work out to around 80 paise on a 40kg bag, said Bhattacharyya.

Overall annual inflation, as measured by WPI, is still contracting and was -1.74% on 1 August. There is, however, a fear that inflation may bounce back later in the year, especially since food price inflation continues to be firm — the pressure will only worsen with the country declaring drought in 171 districts in the middle of its most important crop season, kharif.

The National Council of Applied Economic Research in its monthly report on 12 August said that the possibility of the inflation rate rising in the current fiscal cannot be ruled out.

“Rise in prices of basic raw material may have multiplier effect on inflation, apart from direct impact on the indices, which in recessionary time, may have adverse impact on the economy,” said Dipesh Dipu, principal consultant (mining) with audit and consulting firm PricewaterhouseCoopers.

Crisil Ltd principal economist D.K. Joshi said: “The coal price increase will have an impact on energy-intensive industries. However, I do not see it as a major problem on inflation for the next couple of months. Going ahead, it will add to the cost of raw materials.”

CIL believes that the price hike will help CIL partly offset the increase in input costs, such as a higher wage bill on account of the Sixth Pay Commission, and thereby show a healthier balance sheet ahead of its proposed listing on bourses.

“That’s (listing) the idea. In declining profitability, who will invest? This will help us with our proposed listing,” said Bhattacharyya.

Indian coal (with a calorific value of 3,500 kilocalorie per kg) is priced at around $38 (Rs1,835) per tonne, around 30-40% lower than international prices.

India has 256 billion tonnes of coal reserves, of which around 455 million tonnes (mt) per annum is mined. CIL is targeting a production of 435 mt this year, against 403.73 mt achieved in 2008-09.

Demand for coal is expected to reach about two billion tonnes a year by 2031-32, about five times the current rate of extraction, with the maximum demand coming from the power sector.

Disclosure: Author does not own any of the stocks discussed here.

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