Tom Price of Global Commodity Analyst, UBS Equities is of the view that by Coal India signing the FSA (fuel supply agreements) does not secure the supply option. The government needs to incentivise CIL to expand production by creating competition or lift the price of the coal they sell into the market.
Tom Price, global commodity analyst, UBS Equities is of the view that by Coal India signing the FSA (fuel supply agreements) does not secure the supply option. The government needs to incentivise CIL to expand production by creating competition or lift the price of the coal they sell into the market.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: It is a done deal. The directive is here for Coal India (CIL) and indeed for the power companies but you have a different take that this is a two step back kind of move in terms of providing coal for the entire sector- take us through what your prognosis is?
A: At the moment they are trying to secure supply for the power utilities in India and the way are going about is pushing Coal India into signing these supply contracts, these is fuel supply agreements (FSAs). It seems to me that Coal India doesn’t have a choice but to sign them but it really doesn’t secure the supply option.
If Coal India cannot deliver the coal then that is just a simple fact and you can charge them what you like but the fact is they will still struggle to get coal to the market. They don’t have a price incentive in place and are struggling to expand production under current circumstances.
So the government really needs a different strategy and they somehow need to incentivize Coal India to expand production. There are two ways you can do that. You can create competition or you can lift the price at which they sell coal into the market. History shows those sorts of incentives work and I think that is what the government should probably think about rather than forcing them to sign contracts.
Q: But now that the presidential directive has come, how do you see things pan out from here? How do you see the situation pan out for Coal India?
A: I think Coal India will be forced to sign the contracts because the Prime Minister has told them to do so. Over the next 6-12 months it will become clear that even if CIL expand production it still won’t be enough. So they will disappoint and there will be calls for a break-up of the monopoly and their assets should be handed to other players. This is usually how monopolies come under pressure.
perhaps eventually government will either allow other parties to lift import flows or for some other deposits that are under CIL’s present control to be handed to other players. So, you will basically see the coal supply expansion options that are currently under CIL's control, be handed to other players and that could take several years to play out.
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