Coal Miner’s $1.4 Billion Rail to End Imports: Corporate India

Coal Miner’s $1.4 Billion Rail to End Imports
A laborer unloads coal at a wholesale market in India. India, which generates 57 percent of its electricity from coal, plans to add 118 gigawatts of generation capacity in the five years ending March 2017. Photographer: Dhiraj Singh/Bloomberg

Coal India Ltd., set to build a $1.4 billion railway link through its three richest mining regions, said the untapped pits will help the world’s second-biggest thermal coal importing nation end overseas purchases.

The 203-mile (327-kilometer) network, to be funded by the company and built by Indian Railways in five years, will free up 300 million metric tons of coal annually in the states of Odisha, Jharkhand and Chhattisgarh, Coal India Chairman S. Narsing Rao said in an interview. Indian power companies pay about 40 percent more than local prices to import 70 million tons of coal, about 20 percent of their annual consumption.

“The railway line can eliminate the need for imports of thermal coal in five years,” Rao said in an interview from his office in Kolkata. “Given the reserves we have, we should not have to depend on other countries for electricity generation.”

The state-owned company, which is the world’s biggest producer of the fuel, needs to step up output to comply with Prime Minister Manmohan Singh’s 2012 directive to ensure adequate supply and prevent blackouts in an economy expanding at the slowest pace in a decade. Failure to guarantee supplies to utilities will result in a penalty for the firm whose production growth has stalled in the past three years.

Stalled Projects

Coal India shares have advanced 2 percent in the past year, compared with a 9.7 percent gain in the benchmark Sensitive Index, according to data compiled by Bloomberg. The stock fell 0.1 percent to 338.45 rupees, the lowest closing price in almost eight months.

Power projects worth at least $35 billion announced by billionaires including Anil Ambani and Gautam Adani, have stalled because of fuel shortages. A peak shortfall of 9 percent in electricity supplies leads to outages that shave about 1.2 percentage points off India’s annual economic growth, according to government estimates.

The company’s proposal for the railway link has been delayed for more than six years, pending approval from the railway and environment ministries. The government last year formed an inter-ministerial panel to push the project following Singh’s order.

“The heavy penalty Coal India has to pay if it fails to supply its customers is driving it to do everything it can to boost production,” said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. in Mumbai.

Volumes, Prices

Coal India, which must pay as much as 40 percent of the value of any supply shortfall as penalty, reported a 19 percent increase in profit to 30.8 billion rupees ($575 million) for the second quarter ended Sept. 30. A rising wage bill suppressed revenue gains and led to earnings missing analyst estimates.

Coal India, which accounts for more than 80 percent of the nation’s output, last raised prices two years ago. It had cash worth more than $12 billion as of Sept. 30.

“The company’s sales volumes are not increasing the way they should and there’s no visibility on prices,” said Rahul Jain, an analyst at CIMB Securities India Pvt. in Mumbai, who has an equivalent of a sell rating for the stock. “For commodity stocks, you need to have good volumes and prices. Both are missing here.”

Of the 52 analysts that cover the company, 35 recommend purchasing the stock, while five advise selling it, according to data compiled by Bloomberg.

Social Unrest

India’s annual thermal coal demand is expected to climb 43 percent to 730 million tons by 2017, while supplies from local mines may increase 38 percent to 565 million tons, the Planning Commission’s energy adviser I.A. Khan said in an interview. Cheaper local coal will lower the cost at existing plants, while ensuring energy security to upcoming projects.

Coal India has said it will start importing to meet its supply contracts. While the company’s output is forecast to rise 6.4 percent this year to a record 464 million tons, it will still fail to meet demand.

“Law and order issues have been the biggest impediment to output,” Coal Minister Sriprakash Jaiswal said last month.

Some mines in the eastern states of Odisha and Jharkhand on an average remain shut for three days in a month because of social unrest, Coal India Personnel Director R. Mohan Das said in an interview, without elaborating on the loss. Delays in environment approvals and difficulties in acquiring land have also affected production, he said.

India, which generates 57 percent of its electricity from coal, plans to add 118 gigawatts of generation capacity in the five years ending March 2017, Khan said. Power companies added about 55,000 megawatts in the five years ended March 31, the most in a five-year period. The country has installed generation capacity of 211 gigawatts.

“India is doing everything to increase coal production,” said Debasish Mishra, a partner at Deloitte Touche Tohmatsu India Pvt. in Mumbai. “The railway plan needs to be supplemented with speedy approvals and efficient project management.”

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