India Scraps Linkage Panel for Coal, Introduces Fuel-Supply Agreement

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Indian government has changed the rules for allocating coal to consumers. The standing committee of the Ministry of Coal that established coal linkages has been dissolved. Instead, the government has decided that coal supplies will be governed by fuel supply agreements (FSAs) that will be negotiated directly between the coal producer, Coal India Limited (CIL) (Kolkata) and consumers.

The standing committee for linkages was established in 1979 to govern coal supplies to user industries. In 2007, the government framed the New Coal Distribution Policy, which stipulates that coal will be supplied through agreements between producers and users. However, the policy has not been implemented until now.

A meeting of the coal consultation committee, comprising representatives of coal producers, user industries and coal ministry officials, met recently and decided in favor of scrapping the standing committee on linkages and implementing the FSA regime.

The new FSA regime will put all linked consumers within the purview of CIL. An FSA-monitoring authority will be set up to oversee producers and consumers, implement the suppliers' agreements, and help resolve any disputes that may arise.

Officials at CIL said, "Until now, giving coal linkages was completely a matter of the Coal Ministry, although CIL was consulted on the quantity of supplies to the consumer. We are awaiting the guidelines on FSA from the ministry on what CIL will need to do with existing consumers under linked supplies, and whose applications under linkage system are pending before the coal ministry."

Some coal users, such as NTPC Limited (BSE:532555) (New Delhi), India's largest thermal power producer, have sought flexibility in FSAs, attempting to obtain the option of "alterable short-term linkages," which would permit users to buy coal from alternate sources if CIL cannot provide coal because of supply shortages. However, CIL contends that previous failures to supply coal in agreed quantities were not because of shortages of coal, but shortages in the availability of railway wagons to carry the coal. Therefore, FSAs will clearly mention that CIL will not be held responsible for a lack of supplies owing to transportation problems.

Under the FSA, it will be mandatory to provide CIL information about the end use of coal supplied to consumers under the agreement. This will help prevent any diversion of coal to non-core-sector industries. An estimated 60,000 tons of coal per year is diverted from the supplies of Bharat Coking Coal Limited (BCCL), a wholly owned subsidiary of CIL, which ends up in the black market. The coal is diverted into the black market mostly by small and unorganized foundries and factories that sell the coal rather than use it to fuel furnaces, CIL officials said.

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