Coal India needs tight quality control to profit from new pricing policy

Coal India's decision to move to the global standard of charging customers based on the actual consumption of the gross calorific value (GCV) of coal may work in the company’s favour only if it can control quality and assure supplies in the higher bracket of a said coal grade. 

The current pricing mechanism, according to a Coal India official, is based on considering the mid-point of the GCV range of a particular grade. Thus, if the miner supplies coal that is higher than the mid-point GCV, it loses revenue. Under the new mechanism, this would change.

GCV is the amount of heat released by the complete combustion of a unit of natural gas or coal.

To elucidate this fact, the official pointed out that G11 grade of coal has a GCV range of 4,000-4,300 kcal. The price of G11 has been fixed at Rs 955 per tonne considering the mid-point GCV to be 4,150 kcal. 

"Now, if we supply coal which is beyond 4,150 kcal, we lose money. However, if we supply coal based on this mid-point, the price is justified," the official said.

Under the new mechanism, which will be effective from the 2018-19 financial year, the consumer will be charged based on the actual GCV consumption, which eliminates the scope of losing revenue.

However, the world's largest miner needs to be cautious. 

Coal consumers have been complaining a lot about the quality of Indian coal alleging not only about grade slippages but pointing that the coal supplied is towards the lower end of the contracted GCV range. 

An official with the Coal Consumers Association (CCA) said that although India has the world's fifth-largest coal reserves at 308.80 billion tonnes, the coal seams in the country are laden with stone bands and layers. Thus, the deposits are not as pure or refined as is the case with Australia, South Africa or other producers.

As a result, during the coal crushing process, stones also get crushed. However, the company manually removes these stones as much as possible.

"Primarily because of this reason, the actual GCV varies and is often lower than the one contracted or desired. After all, Indian coal deposits are not homogeneous as in other major producing countries," the CCA official said.

However, if this purification process can be perfected by the company, the alleged GCV issue between the consumer and the miner can be solved and the new pricing policy can work in Coal India's favour.

"This pricing mechanism can be practiced in other countries as the quality can be controlled and the tolerance level is extremely low. But for Indian coal, there is some doubt on the extent of assuring homogeneous quality," the official added.

Hence, according to a sector analyst with Edelweiss Securities, quality control becomes the most important issue.

"The revised pricing policy can benefit Coal India only if it can assure supplies to the consumer at the higher end of the contracted GCV range," the analyst said.

A second Coal India official said that the revision in the billing policy was imminent as it brings the miner at par with global practices and would benefit the consumers. 

Citing another example, the official pointed out that under the current pricing mechanism (which will lapse on or before March 31, 2018), the consumers were paying Rs 3,210 a tonne for all G2 grade of coal. This grade has a GCV range of 6,701-7,000 kcal. 

"Under the new pricing policy, for the same grade, consumers will have to pay Rs 144 per tonne less for the same coal having a GCV of 6,701 kcal as compared to coal with GCV of 7,000 kcal," the official said, adding that the new pricing mechanism makes the process more transparent, fairer, and much more linear.

However, Coal India will continue to have the current 17 coal grades in place.

Nevertheless, analysts caution Coal India of revenue shortfall in case the exact contracted GCV is not supplied. 

"In case where the GCV is lower than what the consumer has paid for, Coal India has to credit back the differential amount. However, if the supplied GCV is higher, then Coal India might ask the consumer to pay the similar differential amount," the analyst with Edelweiss Securities explained.

Coal India officials, however, are confident about maintaining a homogeneous grade to assure that the miner doesn't lose out on revenue due to this new pricing mechanism.

"Officers in charge of mining, who are deployed right at the coalface, have been asked to contain grade slippages within 10 per cent. Also, to control the quality internally, a portal has been set-up which traces the life-cycle of samples," the Coal India official said.

Apart from functional area laboratories that analyse the coal, Coal India is also maximising the use of surface miners for open-cast mines, which it claims improves quality and helps maintain it.

Snapshot of new pricing policy and its impact

  • New GCV-based pricing policy to come into effect from April 1, 2018
  • Existing coal gradation practice to continue for the time being
  • New pricing policy requires tight quality control
  • Can increase Coal India's revenue if it is able to assure homogeneous GCV as per the contract
  • Coal India has already taken up various quality control measures; consumers and analysts remain sceptical

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