Coal India to terminate FSAs with customers who renege on contracts

The two subsidiaries of CIL – Eastern Coalfields Limited and Northern Coalfields - together accounted for around 88 per cent of the company’s total incentive gain
The country’s national miner Coal India (CIL) is planning to terminate fuel supply agreements (FSAs) with its customers reneging on contracts, citing reasons of ‘low quality’ and ‘transportation cost’. 

The company said such customers had paid a premium for securing coal through auctions in the past without complaints. But “now, with Covid-19-induced slowdown, when the demand for coal is low and the floor prices for coal relatively lower, some customers are moving away, citing reasons that are not reasonable,” it said. 

Recently, there were reports that Vedanta, Jindal Steel & Power, and Hindalco Industries have terminated their supply contracts with CIL, citing low grade of coal, frequent changes in the grade supplied, and high transportation cost. The companies had got supply contracts with CIL through auctions held by the latter between 2016 and 2018. 

In a public statement, CIL said it takes serious cognizance of its coal quality. “The reason of quality is a lame excuse. Transportation costs being high are a frivolous reason to pull out, as customers willingly obtain linkage for road mode with full knowledge of the distances,” said the statement. 

The monopoly miner said it is considering stopping any further FSA with those customers, “who renege on committed agreements and decide to terminate their contracts abruptly”. 

The company further said Rs 1,365 crore provisioned under coal quality variance in the earlier years has been withdrawn, in the last financial year, which is a net gain for CIL. 

The company also earned Rs 1,760 crore under performance incentive during the previous two financial years combined. The incentive earned was for supplying above the average contracted quantity to its customers with which it had an FSA.

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