CIL’s inability to do underground mining is a big problem
While most in the government are focused on whether Coal India Limited will deliver the promised money to the disinvestment kitty by way of divesting its shares or by way of a special dividend from its R70,000 crore cash reserves, this is being short-sighted. As investor-services company SES points out, Coal India is a lot more inefficient than previously thought. Coal India’s inability to raise production is well-known, as is its penchant for raising prices—it raised prices of low-grade coal by 11% in May and prices of its western coalfields’ produce 10% this week. While this could be pardoned if it took place in an environment of increased productivity, in CIL’s case, has grown very slowly, by 14% in the case of open cast mines and by nothing in the case of underground mines over the past two years—and this is a fraction of the global best practice.
What is even more worrying is that while the future lies in underground mining, CIL’s productivity here is a fifteenth that in the open cast mines—the performance is so poor, that while underground mines production contributes a tenth to CIL’s production, it has resulted in CIL’s productivity falling nearly 50%. As a result, while it costs CIL R4,900 per tonne to produce coal from underground mines, the average realization is just R1,470, or a loss of R12,800 crore in FY13. Put another way, if you reduce CIL’s production by 10%, its profits will jump 50%. While that is what SES wants from a shareholders’ perspective, that is not something India can afford. One of the decisions the next government has to take at the earliest is getting in efficient private sector players and hand over CIL’s underground mines—through an auction—to them. India badly needs the coal, but it can’t afford to have CIL continuing to bleed the way it is right now.