Differences over the issue of pricing has put the Steel Authority of India Ltd (SAIL) at loggerheads with Coal India Ltd (CIL) with whom the public sector steel giant is trying to formalise a three-year coal supply agreement. The conflict is centred around the determination of a base price for the supply of low-ash content coking coal to SAIL over the three year period.
The last meeting between the representatives of the two companies, which was held on Wednesday, December 3, ended inconclusively with Coal India raising objections to a fixed base price for the coal to be supplied. The meeting was the ninth in a row to take place between the two companies over the proposed agreement. The month of July was the original deadline set by both parties for the formalisation of the proposed agreement.
The latest setback to the proposed agreement will undoubtedly have repercussions on the cost cutting efforts being implemented by the steel giant for achieving better profitability in the current fiscal, a SAIL spokesperson told Business Standard. The determination of a base price for low-ash content coal will be one of the key issues of the agreement. This is expected to stem the constant tussle between the two parties on the issue of pricing.
The agreement is being conceived as a legally enforceable contract which will ensure that penalties are imposed in the event of either party defaulting in any of its commitments. The odds are against the steel major which stands to incur heavy losses if it is to continue to buy coal from CIL without a pre-determined base price. The cut-off on the percentage of ash permissible in the coal supplied by each of the divisions of Coal India will have to be determined first followed by the uniform base price which will be applicable to all divisions.
"Unless a base price for low-ash content coal is determined the outflow in resources will continue for SAIL which has to make considerable investments in importing coking coal to make up the deficiencies in the coking coal supplied by CIL." the spokesperson said. SAIL imports about 5.5 million tonne of coking coal every year out of its total annual requirement of 13 million tonne. Under the protection of the proposed agreement, the public sector giant will be able to monitor the quality and timely delivery of coal. Coal India would also be safeguarded against losses arising out of last minute order cancellations.
The success of the pact will however be contingent on CIL's ability to improve quality with the steel major having taken a tough stance on the issue in the form of stringent quality stipulations. SAIL purchases more than half of its annual coal requirement of 13 million tonne from CIL. The target is to bring the ash content ideally down to 20 per cent which is still high compared to the world average of 17 per cent.
SAIL hopes to save at least Rs 1000 crore this year through cost reduction measures and coal being a priority item on the cost reduction agenda. The steel major plans to cut down coal consumption by two million tonne during the current fiscal.
SAIL officials however emphasised that the proposed agreement is far from being written off by both parties. Negotiations will continue till a workable solution is found which will be to the satisfaction of both parties. Representatives of both companies plan to meet formally again at a given time later.
