Demand slump a bigger risk for CIL than commercial mining

May 21,2020

The move by the government to facilitate private sector participation in coal mining, remove end-user restrictions and move to a revenue-sharing mechanism has affected the shares of Coal India Ltd (CIL). The stock plunged by 6 percent, closer to its 52-week low. Coal India's relief of Rs 5,000 crore to its customers, lowering the reserve price at auctions and providing favorable credit terms, has left further unnerved investors. But the initiatives alone do not warrant the sale of the products.

The first package of steps followed The Mineral Laws (Amendment) Ordinance 2020, promulgated in January, to open up commercial coal mining to the private sector. As a result, the most recent government measures are only incremental.

Motilal Oswal Financial Services Ltd said, “ The government has been fairly transparent about the move to increase private participation. It had sought this earlier as well." The favorable commercial terms for non-power customers are not out of sync either. Demand has declined and customers across industries have reduced purchases of coal. This is reflected in the 26 percent fall in year-on-year coal dispatches in April.

Coal India will stimulate demand with rising inventories and the upcoming monsoon, offering better price terms, an analyst at a domestic broking firm said. The lack of assurance on the economy’s opening up, however, clouds its outlook.

Offtake in the power sector was hit during the lockdown. In April, thermal power generation dropped 28 percent. Coal inventories are piling up at thermal power plants. Thermal plants had inventories for 30 days against 17 days of inventory a year ago, Central Electricity Authority data show. This is not to brush aside the upcoming private-sector rivalry. Concerns about private competition eroding the company of Coal India are premature. The performance of coal mines which were auctioned and allocated in 2014-15 wasn't promising, said Emkay Global Financial Services Ltd.

Major hurdles are land acquisition, environment and forest clearances, and procedural delays. "The output from such commercial mines may not be significant for the next three to four years," added Motilal. Furthermore, coal imports continue to rise. In FY19, about 24 percent of coal was imported, data from ICICI Securities Ltd shows. While Coal India met 62 percent of demand, the large import bill leaves room for both the firm and the private sector.

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