Coal India poised to profit from tight supplies and rising prices

Strong spurt in demand for thermal power during the current financial year has fueled the demand for coal. The company’s efforts to ramp up production, coupled with a jump in coal prices, mean that earnings prospects are upbeat. The company’s production and dispatch for September remained strong despite being impacted by the monsoon.

Dispatches were up 3.6% year-on-year for the month and 20.6% year-on-year for the April-September period. The surplus inventory with Coal India at the beginning of the year has also come down. According to analysts, coal demand is expected to remain strong as coal reserves at power plants have declined significantly (about 73 per cent compared to last year).

This left about 121 gigawatts (GW) of generation capacity with reserves of a week or less during the second half of September. Analysts at Antique Stock Broking Ltd say coal reserves have fallen to their lowest level in almost three years. Demand for coal is expected to remain strong, driven by supply and rising prices of other energy sources such as natural gas.

With strong demand from the power sector, the e-auction premium is also expected to rise. Coal India had received around 10% premium over notified prices during the June quarter (Q1FY22). But in the month of August itself, the e-auction premium had increased by 30%.

Part of this is due to rising international coal prices. Global coal prices have risen due to rising natural gas prices and tight coal supplies in China. Coal futures have already touched $240 a tonne, an increase of more than 170% during the year. The rise in global coal prices will not only support the e-auction prices of Coal India but will also reduce the import of cheap coal into the country.

As such, the firm is attempting to replace the amount of imported coal with its own supply to drive growth. In addition, Coal India is looking to increase the prices of coal being supplied under the fuel supply agreement. Rising coal prices may support its case. A price hike is necessary if Coal India is to compensate for the expected increase in its wage bill.

Analysts at Antique Stock Broking say the wage hike, which is due from July this year, is likely to hurt the firm. ₹10,000 crores. To limit the impact on margins, the company would require a higher proportion of e-auctions with a price increase or premium of 14%. The higher proportion of more profitable e-auctions can compensate for lower fuel supply agreement price hikes.