Coal India may raise prices

Coal India Ltd, the country's largest producer of coal, may finally raise prices of the commodity for the first time since June 2004, Chairman Partha S Bhattacharyya said today.

Since the deregulation of the sector in June 2000, coal prices have risen at a compounded annual rate of 3.5 per cent, far slower than the rise in cost of inputs such as oil, ammonium nitrate explosive and power.

"If we just account for the inflation in input costs, there is room for 8-9 per cent rise in prices," Bhattacharyya said.

The state-owned coal miner may see a decline of Rs 2000-2500 crore in net profits this year if prices are not raised, he said. "We have come to a point where if we don't increase prices, we will be causing self-injury," he said, without mentioning when prices would be hiked.

Coal India posted profit before tax and dividend of Rs 8676 crore for the year ending March 2006. Figures for 2006-07 were not available.

The company's profitability has also taken a knock after a coal wage agreement in July 2005. The pact has raised its wage bill by about Rs 1500 crore a year since then, Bhattacharyya said.

The National Coal Wage Agreement entailed substantial increase in pay "" minimum basic wage was revised from Rs 3,300-5,500 "" for employees of Coal India and Singareni Collieries Co Ltd, with a retrospective effect from July 2001.

Pressure is also mounting from labour unions to put in place better infrastructure to ensure safety and health of mine workers. Coal India currently has about half a million employees on its rolls and plans to add about 600 more staff in different collieries by December.

At a labour industry meeting on coal mine safety Wednesday, trade union representatives raised demand for better mining equipment to mitigate risk, expanded coverage of health facilities and better compensation for those who lose their lives on work.

Despite deregulation of the sector, coal prices have remained under government scrutiny largely due to the inflationary impact of the fuel.

High ash content""as much as 35 per cent compared with about 10 per cent in Australian and African coal""has also kept prices suppressed.

Analysts said hike in coal prices was a cause for worry as it would directly impact core sectors, and have an indirect impact on most others as power tariffs may rise subsequently.

"After the hike in royalty, now if coal prices are hiked, it will be a severe blow to steel, cement and power sectors," Vishal Mishra, an analyst with IL&FS Investsmart, said.

Last week, government had revised the structure of royalty given to states by mining companies on coal and lignite by introducing an ad valorem (price-based) element. Net royalty on coal is estimated to increase by 24 per cent.

Steel Authority of India Ltd, which sources about 10 million tonnes of coal from Coal India annually, is likely to take a major hit, Mishra said. Power generation companies, which account for about 70 per cent of India's total coal consumption, may be forced to factor in the hike in tariffs.

Coal has several advantages over oil and natural gas, which explains the rapid proliferation of coal-fired power plants across the world.

Coal is abundant, cheap and almost free from price shocks by virtue of its wide distribution.

An industry official, however, questioned the coal major's ability to raise prices in the current inflation-sensitive environment.

"There is a risk of an inflationary rebound if coal prices are raised, and I don't think the government will want to take that risk," the official said.

According to latest data, India's headline inflation rate eased to 4.28 per cent for the week ended June 9 as against an over two-year high of 6.69 per cent January-end.