Coal of India may scale back production to deal with 40Mt stockpile

KOLKATA (miningweekly.com) – The Indian government is considering issuing a directive to force the country’s largest coal producer, Coal India Limited (CIL), to cut back its production in a bid to deal with the miner’s rising coal stockpile.

In a sharp reversal of fortunes, from production shortages to a surplus and falling demand, CIL, which accounts for about 80% of domestic coal supply, was likely to be nudged to ease production, as it would soon run out of stockyard capacity and risk mounting carrying costs, an official in the Coal Ministry has said.

The official added that Coal Minister Piyush Goyal had made it clear that CIL would need to aggressively liquidate the estimated 40-million-ton pithead stocks and even consider lowering prices to increase offtake by consumers.

However, with sales remaining slow, CIL was fast being left with little option but to prune production to avoid the imminent problem of oversupply, the official stated.

The latest trigger for the miner to ease off the production pedal was the Coal Ministry’s cancellation of the latest round of coal e-auctions for the power and nonpower industries, in a bid to liquidate its stocks.

The e-auctions were set to start last week and conclude on Tuesday. The Ministry had not officially stated any reasons for cancelling the auctions, but industry sources said that the reserve price set was too high and that the government was concerned that there would be no bids.

It was learnt that the reserve price was set about 20% higher than the 'notified' price that CIL generally supplied to consumers under negotiated fuel supply agreements, an industry source said.

The source said that prospective bidders would have been interested to participate in the auctions had the reserve price set been equivalent to the 'notified' price, as consumers, which have the option of cheaper imports, were not willing to pay the 20% premium for domestic coal.

In fact, the cancellation of another round of auctions followed soon after the dismal response to the October round, when CIL only received bids for about half of the five-million tons of coal on offer, indicating the dissipating appetite for coal among user industries.

No clarity was available from Ministry officials on any rescheduling of auctions or whether the government would look into consumer demand regarding lowering the reserve price.

At the same time, while the Ministry was mulling over a directive for CIL to cutback production to ensure strategic and cost effective management of existing stocks, no clarity had yet emerged on the quantum of such a possible production cutback, the official said.

CIL had reported a production growth of 9% during the April-to-December period and was expected to sustain such a growth rate through the financial year, hitting output of 550-million tons in 2015/16, without any cutback imposed during the remaining days of the financial year.