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Coal India Faces Profit Squeeze on Plan to Hold Price Increase

Coal India Ltd. (COAL)’s profitability may slip after the world’s biggest producer of the fuel said it will refrain from raising prices as the government struggles to control inflation.

State-owned Coal India doesn’t want to prompt increases in power tariffs and will try to compensate for higher wage bills through other means such as increasing volume, Chairman N.C. Jha said in an interview yesterday. Almost half of India’s power generation capacity is fueled by coal, according to the Central Electricity Authority.

“The market is expecting an 8-10 percent price increase after the wages are revised and if that does not happen, it’s bad news,” said Rahul Jain, an analyst with RBS Equities India Ltd. in Mumbai. “I expect the salary bill to rise by 30 percent and the last price increase will not be able to offset the entire cost burden.” He has a sell rating on the stock.

India’s utilities were spared when Kolkata-based Coal India increased prices of various grades of coal in February, which will add 62 billion rupees ($1.4 billion) to the company’s sales in the current financial year. India’s central bank raised borrowing costs this month for the ninth time since March 2010, the fastest pace of rate rises among major Asian economies. Inflation has remained above 8 percent for 16 months.

Wage Burden

Coal India may have to increase prices a second time in 2011 to lessen the burden of the wage revision, Coal Minister Sriprakash Jaiswal said on March 22. Two calls made to his office yesterday seeking comment went unanswered.

Coal India will continue with spot sales of coal through electronic auctions to help consumers that don’t have supply agreements with the miner, Jha said.

Private power producers want spot sales to be halted to help bridge a shortfall in coal supplies, the Economic Times reported May 18. Coal India sells about 10 percent of its coal through auctions.

“There is no question of stopping e-auctions,” Jha said. “The power ministry and the power companies have to address transportation issues rather than blame us for their problems.”

Coal India set aside 335 million metric tons of coal in the year ended March 31 for power utilities, which lifted 304 million tons, Jha said.

Coal India is discussing with the coal ministry a proposal to buy a 15 percent stake in one of Peabody Energy Corp. (BTU)’s mines in Australia,’’ Jha said, without elaborating.

“There are three active proposals with us and this could be the first one to materialize,” he said. “Due diligence is nearly over for all three.”

Besides Peabody, the company is evaluating stake purchase proposals for a mine of Massey Energy Co. (MEE) in the U.S. and one mine of Novem Sinarma in Indonesia, Jaiswal said on April 6.

Each of the assets is valued in the range of $400 million to $800 million, Jha said.

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editor responsible for this story:

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