Coal Price increase : Power sector feels the pinch..

Coal price hiked last was December12, 2007 ......

• The Union Government allowed Coal India to hike prices by 11 per cent on an average with effect from October 16, 2009. The price rise comes after nearly two years. The hike in prices may leave a positive impact of Rs 4,600 crore on the company’s bottomline on an annualised basis. Without the price hike, the company would have ended the year with lower profits due to negative impact of a wage hike . The Union Government has also allowed CIL to implement a remunerative pricing mechanism to remove the fundamental weakness of two of its perennially sick subsidiaries — Bharat Coking Coal (BCCL) and Eastern Coalfields (ECL) — despite owning the country’s best coal reserves.
• The prices of coal produced by all other subsidiaries have been increased by 10 per cent. According to a CIL release, BCCL will have a higher price rise of 15 per cent for its 30-million-tonne raw coal production which include the country’s only source of prime coking coal. ECL is allowed to charge import-linked prices for A and B grade thermal coal production, accounting for over 30 per cent of the approximately 31 mt total production.
• The coal price hike would leave a maximum of 0.16 per cent inflationary pressure on the economy. It is estimated that for the power sector, the cost of coal would increase by Rs 77 a tonne and the price of electricity would go up 5 paise a unit. The price of cement is expected to move up by Rs 20 a tonne.
• The price hike was long overdue and after the wage revision of CIL, it became impossible for the coal companies to maintain a healthy profitability ratio. Some projects became unviable due to financial implications of the wage revision.
• But on the other hand, it directly impacts the coal consuming sectors, particularly power sector the most. The power sector already started lobbying the regulatory commission to pass through the price hike to the consumers. Gujarat State Electricity Corporation Limited (GSECL) has already expressed its concerns on coal price hike.
• The revival of economy is a good sign for the industries. Coal production which has weightage of 3.2% in the IIP (Index of Industrial Production) registered a growth of 6.5% (provisional) in September 2009 and electricity generation (weight of 10.17% in the IIP) registered a growth of 7.5% (Provisional) in September 2009.Thogh the signs of improvement in growth is quite encouraging, the price increase may send a wrong signal to the market which is already struggling to come out of global recession. The steel sector may absorb the price hike but it would be very difficult for the cement sector to absorb the cost. Currently the cement sector is not increasing the cement price and watching the market movements but they will definitely pass on the increase in coal price hike to consumers.
• On one hand when the country is under severe power shortage scenario, it is to be seen that how consumers behave to a hike in power sector tariff due to price hike by the major input for the sector (i.e) coal.