Higher wage cost forces Coal India to hike prices 30%

Unable to absorb the higher dearness allowance (DA) paid to its employees, Coal India Ltd has hiked coal prices by 30% effective Sunday.

“We were unable to bear the severe impact of increased wage cost and had to pass it on,” said a very senior official in Coal India, the world’s biggest coal producer.

The company’s DA liability has gone up from 27% to 50%.

DA is an allowance the government pays to its employees due to rise in inflation.

“We are a people intensive industry, so the effect of increased DA as a result of a sharp increase in inflation has been a bit too much,” the official said without putting a value to the payout.

Coal India has close to four lakh employees and accounts for 80% of the country’s total coal production.

Also, the other costs associated with mining of coal have also increased because of increased inflation and this has seriously curtailed growth of the company this year.

“Coal India witnessed that its ability to absorb the inflationary pressures has been almost eroded and this was making all upcoming projects unviable,” the official said, adding that in case the company didn’t increase prices, it would have had to scrap the projects. “Even at the planning stages, we realised they were turning unviable, especially the underground mining costs.”

The maximum increase in costs has been effected in grade A and grade B coal, which are rarely used. “This is the highest quality of coal that we sell, which has calorific value of almost 5,500 kilo calories per tonne,” he said. Both the grades have seen a revision of over 150% in their prices. The last time the company revised its prices was in November 2009, when A and B grades were revised to Rs1,600 per tonne and Rs1,520 per tonne, respectively. They have now been increased to Rs4,000 per tonne and Rs3,990 per tonne, respectively.    

However, the company has ensured that power and fertiliser companies are not hit hard.    

“Power and fertiliser companies are users of coal which are below grade B and no price rise has been done there,” the official said.

This will especially include coal sold through e-auction route. The base price for coal sold through e-auction route will be 30% higher, he said.

This will be a big relief for power companies as they are the biggest consumers of coal in India. “The demand from the power sector, which accounts for over 70% of the country’s overall coal demand, has been a major driving force behind a demand CAGR growth of 8% in five years. Other sectors that have also played a role in the increase in demand include steel, cement, and brick kilns,” said research analyst Anjan Ghosh and Jayanta Roy from ratings agency ICRA.

Analysts say that while power and fertiliser companies will not be affected, even steel companies, another major coal-guzzling industry will also be saved from the brunt. Steel companies use coking coal as a raw material blast furnaces.

“Steel companies usually import coking coal and their domestic sourcing is bare minimum,” said Ravindra Deshpande, analyst with Elara Capital. He said Tata Steel, JSW Steel and SAIL will see no effect but small companies purchasing from Coal India’s subsidiaries will take a hit.

“Sponge iron producers will see their margins being eroded, especially because there is already a high cost push for them owing to inflationary pressures,” said Rahul Sonthalia, vice-president, MPA Finsecurities.
Coal India has increased prices of all the three grades —- Washery Grade I, II and III —- by 30%.