Why signing FSA will not solve coal supply issues

A reluctant Coal India  (CIL) is likely to ink fuel supply agreement (FSA) with power producers in a day or so. A presidential directive has been issued to CIL to commit minimum delivery of 80% of the assured supply to the power producers.

The goverment expects this step to provide relief to the power companies. However, Tom Price, global commodity analyst of UBS Equities feels, pushing Coal India to sign FSAs will not ensure adequate supply.

According to Price, Coal India would struggle to get coal to the market because a price incentive is not in place. The PSU has also been struggling on several fronts to scale up production due to hurdles like delay in regulatory clearances for new and expansion projects.

So, instead of pressing Coal India’s hand for supplying coal, the government should incentivise Coal India to expand production, he suggests. “The government can do that by creating competition or by lifting the price at which coal is supplied in the market,” he added.

Coal India's independent directors were unwilling to sign FSA due the penalty clause involved, which said the company would attract penalty if it fails to meet the 80% fuel supply commitment. But now, this has been left to the PSU board.

How does the way ahead look like for CIL?

The Prime Minister has asked the company to sign the contact, so it has no choice, but to enter it. However, after a span of six-eight months despite expanding, Coal India’s production will not be sufficient and it will disappoint, he foresees.

This would pressurise the government to break Coal India’s monopoly and hand over its assets to other players. "The coal supply expansion options that are currently under CIL's control, will be eventually handed to other players and that could take several years to play out," he added.

Meanwhile, CIL missed its revised production target of 447 million tonne and achieved only 435.84 million tonne in 2011-12. However, coal minister Sriprakash Jaiswal does not see any reason for the company to import coal. Unlike the minister, Price expects India to import about a 115 million tonne of coal this year.

For Tom Price's complete interview click HERE .