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Mining companies' output usually follows a seasonal pattern. But Coal India Limited (CIL)'s monthly production graph follows a trajectory that raises questions on safety and financial prudence.
A Business Standard analysis of CIL's monthly output data through five years shows production sees a sudden and steep jump in March, followed by an equally steep decline the next month.
An attempt to decipher the cause of this perceptible drop at the turn of each financial year in an otherwise smooth graph reveals how the miner's obsession for production targets has led it to rejig output for years, landing itself into a cycle of ramping up output by controversial means, year after year. Experts say the practice, if unchecked, could have serious implications on mine workers' safety, as well as the company's finances.
In March 2012 (the last month of financial year 2011-12), CIL's production stood at an abnormally high 55 million tonnes (mt). As the company was grappling with output constraints, experts expected production to fall two to three mt in April. However, the decline beat expectations - production fell to 32 mt that month. And, this decline wasn't an exception - sharp falls were recorded the previous year (March-April, 2011), as well as the years before that.
The rise in production in March (and the drop in April) can be attributed to the last-minute desperation of CIL's mine managers to churn out healthy output figures and achieve targets as a financial year draws to a close. Towards the end of a financial year, mine managers divert the bulk of machinery and manpower from removing overburden material (the part covering a mineral) to excavating coal.
Coal can be mined only after digging out the overburden material covering it.
This effectively means in the last two months of a financial year, the company excavates coal only in places where the mineral is exposed. Though this increases output in March, production in the next month (April) falls, as no overburden material has been removed in the previous two months. So, in April (and the following few months), the company largely removes overburden material. This leads to a fall in production, which has to be offset by increasing output towards the end of that financial year - a cycle the world's largest coal miner has to grapple with year after year.
A senior CIL official confirmed the company had fallen into this trap, owing to the obsession with targets. He added this year, CIL was trying hard to reverse the trend and break free from the cycle. "Our managers are so obsessed with targets that they resort to desperate acts in the last quarter, particularly February and March. They divert equipment from overburden removal to coal," the CIL official told Business Standard, on condition of anonymity.
Typically, 70 per cent of heavy earth moving machinery equipment is engaged in overburden material removal, while 30 per cent is involved in mining coal. But in the last quarter of a financial year, most of the equipment is deployed in coal mining. "This entire exercise is self-defeating because as you haven't removed overburden in February and March, production would fall in April. This cycle of high production in March and low production in April has repeated itself year after year," the official said, adding the negative impact of this trend was always seen in the results for the first quarter.
"This trend indicates we believe, in postponing, the problem of low production without planning. This is not a solution. We must take steps to improve output over 12 months of a year. We cannot opt for such shortcuts," the official said. This year, the availability of high coal stocks at its mine heads had helped the company reverse the trend, as stocks could be diverted to bridge the gap in output, he added.
Experts say this abnormal trend doesn't just reflect badly on the company's managerial expertise, it could also have ramifications on safety, environment and finance-related aspects. "Production pressure, leading to greater extraction of coal, while not removing overburden adequately, could lead to safety concerns. This could cause alteration of geotechnical parameters, particularly bench slopes, thereby enhancing the probability of slope failures and accidents," said mining expert Dipesh Dipu, partner at Jenissi Management Consultants, an energy and resources-focused consultancy. He added merging overburden and coal benches might lead to contamination of the coal produced. "In such cases, financially, the cost of coal production in a year would not be fully reflective, as the costs associated with the required overburden removal would be pushed to the next financial year," Dipu said. This might be compensated only when the cycle is repeated every year. Therefore, financially, it would be viable to break out of the cycle.
Amrit Pandurangis, senior director at accounting and consultancy firm Deloitte, said the trend was a "bad and unhealthy practice". He added the trend wasn't limited to CIL or mining companies. "It is widely prevalent in companies across sectors. For instance, production of car manufacturers goes up 20 per cent in March and comes down in April. The major reason for this is we work on annual, not quarterly targets," he said.
