Coal India maintains capex despite strains of over supply

KOLKATA (miningweekly.com) – Coal India Limited (CIL) has confirmed that it would maintain its capital expenditure (capex) during the current financial year, despite concerns about falling coal demand, the impact of rising stocks on its bottom-line and the financial impact of a planned share buyback.

According to a senior CIL official, the miner’s capex would remain unchanged at $1.16-billion in 2016/17.

He said that the bulk of the planned capex would be spent on completing ongoing projects, as the Coal Ministry wanted CIL to be ready to ramp up production quickly when a demand for coal returned.

The strategic decision not to scale down planned capex came in the wake of criticism among certain senior level CIL officials that the miner was being forced to focus on increasing production without factoring in current demand dynamics and that the pure “supply side” investment strategy would negatively impact on earnings.

An official statement of CIL issued earlier said, “High coal inventory at coal-fired power utilities, as well as [at] pitheads of CIL, restrained the company to go for higher production during April to May.”

A CIL official, on condition of anonymity, said that the cost of carrying an estimated pithead stock of 50-million tons would be reflected in the company’s statement of accounts.

Coal stocks at thermal power plants in June this year were pegged at 30-million tons, or about 22 days consumption. As a result of the higher stocks at thermal power plants, coal offtake during the April-to-June quarter only increased by 2.9% year-on-year, compared to CIL’s production growth of 9%.

At the same time, even though earnings and profitability of operations were under strain, CIL capex would also remain unchanged in the face of the miner having to commit an estimated $900-million in a share buyback proposed by the Finance Ministry.

To cope with pressures of maintaining capex and the lack of sales, CIL was also banking on opening up of coal export opportunities – a first for the country.

Officials said that the test case for exports of Indian coal would be negotiations with neighbouring Bangladesh to ship coal linked to a thermal power plant being constructed in that country by NTPC Limited, the largest Indian power utility.