Monday, September 8, 2014

Impact of Budget on Coal consumers

The Narendra Modi led government presented its first budget on 10th July 2014 that focused on key issues like widening fiscal deficit, high inflation, slumped economic growth (below 5 percent in last two years) and limited infrastructure facilities. The budget outlined the plan of new government for reviving the Indian economy by reducing the current account deficit, promoting FDI and push to manufacturing and infrastructure sector among others.

For coal sector, the budget offered proposals ranging from tax simplification, rationalization of supplies, and increasing production among others. In FY14, the values of India’s steam-coal and coking-coal imports were 1.9 percent and 1.3 percent respectively of the total imports, which sums around to be about 3.2 percent of the value of the total imports basket. The coal consuming industry, naturally, had mixed reactions on the new budget as it provides incentives on some counts but increases cost of procurement for several players.

Impact on the Imported Coal Consumer: The budget rationalized custom duty imposed on different grades of coal that is expected to remove assessment disputes and transaction costs associated with testing of various parameters of coal. Table below shows change in custom duty and impact on associated sectors.

Type of Coal
Before
After
Sectors Impacted
Impact
Basic Custom Duty
Non-Coking Coal
2%
2.5%
Power
Negative: Increased cost of generation;  major impact where cost of coal cannot be passed on to consumers through increase in tariffs
Cement
Negative: Increased cost of production; to not allow for increase in prices in a competitive market
Sponge Iron
Negative: Increased cost of production; to not allow for increase in prices in a competitive market
Coking Coal
Nil
2.5%
Steel
Negative: Increased cost of production; margins of players to shrink further
Met coke
Nil
2.5%
Counter Veiling Duty (CVD)
Non-coking

2%
2%
Power, Cement, Sponge Iron
Status Quo
Coking Coal
6%
2%
Steel
Positive: however increase in basic custom duty from zero percent to 2.5 percent to nullify the positives

Apart from custom duties, clean energy cess on coal has also been increased from INR 50 per tonne to INR 100 per tonne. This increase in clean energy cess will impact the power and metal producers using imported coal. This recent increase in duties and cess on imported coal in conjunction with slowing global coal prices has forced the industry to rethink their fuel sourcing strategies based on imports. The impact will be more on industries where increased cost cannot be passed on to the consumers.

Impact on Domestic Coal Consumer: The limited supply of domestic coal in the past and huge demand supply deficit has triggered the new government to augment domestic coal supply. In this regard, the government proposes to initiate exercise to rationalize coal linkages to optimize transportation of coal that will include provisions for swapping of FSA based coal linkages among power, steel and cement sector. Apart from this government is also considering comprehensive measures for enhancing domestic coal production specifically by reducing statutory delays.

The government has also increased clean energy cess for domestic coal from INR 50 per tonne to INR 100 per tonne, similar to imported coal. This increase in cess will directly be passed on to the consumers by coal producing companies affecting the cost of production for all coal consumers..

                            By 
      InfralineEnergy Metals&Mining Research Team



  
 Disclaimer:

The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of the Infraline Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the information contained therein and any direct/indirect consequences resulting therefrom.

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