Global coal prices may zoom as CIL needs to go on buying spree

International coal prices are likely to move up further as the world's largest producer Coal India (CIL) needs to go on global shopping for the dry fuel to meet the increased demand of the power sector, an analyst said.

"The international prices of coal are likely to go up as India's state-run miner CIL looks for procuring in the global market. The demand for coal in India is likely to go up manifold as projects go on stream," the analyst with a global brokerage firm said.

The international price of coal is now hovering a little over $100 per tonne.

A Committee of Secretaries, set up by Prime Minister Manmohan Singh to sort out issues relating to the power sector, had asked CIL to sign Fuel Supply Agreements with power plants that have already been commissioned or would go on stream on or before March 31, 2015 for 20 years.

The move may provide relief to power plants with an estimated capacity of more than 50,000 MW.

It requires around 4.5 million tonnes of coal to generate 1 MW of thermal power.

"It will be a Herculean task for CIL to meet the additional obligations since its entire production now gets exhausted to feed the power sector. In the current situation, CIL's only way out is to go for procuring the raw material in countries like Indonesia, Mozambique, Australia and South Africa," the analysts said.

CIL is now in a catch-22 situation as failing to meet the a minimum of 80% of committed supply would invite a penalty. However, in case the supply is above 90%, the company would be provided an incentive.

Since increasing production is not immediately possible, the only way out is imports, an CIL official said on condition of anonymity. However, he could not specify the amount of coal that company would have to import.

India is already grappling with a severe coal crunch amid a widening demand-supply deficit. The gap is pegged at 142 million tonne this fiscal and is likely to increase to 200 million tonne by 2016-17. Coal India accounts for around 80% of the domestic requirement of the dry fuel.