Sri Lanka is marking the end of another coal unloading season that commenced last October to unload coal for the Lakvijaya Coal Power Plant (LVPP), with the unloading of the 30th coal shipment while incurring losses amounting to millions of dollars.

The requirement, as previously stated by the Ceylon Electricity Board (CEB), was at least 30 shipments for the season. The Lanka Coal Company (LCC) has imported the required coal stocks to last until the next season, which is expected to commence in September, while facing numerous obstacles during the past several months with the cancellation of two finalised coal tenders.

Nevertheless, sources close to the subject told The Sunday Morning that the coal supplies had been brought down at an excessively high cost as the country had not benefited from the coal price reduction in the world market.

Sri Lanka’s losses from coal

Highlighting the prices, the source stressed that Coral Energy had supplied coal at a fixed rate of $ 240 per MT since March on a long-term credit facility. However, according to the World Bank Commodities Price Data (The Pink Sheet), coal prices (South Africa) had dropped to $ 144.7/MT in February this year from an average of $ 219.8/MT reported from January to March 2022.  

As per calculations, Sri Lanka has lost around $ 48 million due to the inability to proceed with index-based price contracts for the season that commenced last October and ended last week.  

Some officials within the CEB had vehemently opposed entering into long-term contracts to import coal at a fixed rate at a time when prices of coal have risen to their maximum price points in the world market due to political and economic factors.

At the time, a group of engineers had predicted that the world market prices would see a drastic reduction towards the middle of this year, while urging the authorities not to go ahead with long-term tenders.

Cabinet recommendations for coal contracts

Despite the warnings, the authorities floated tenders for long-term contracts.

Accordingly, the LCC is currently working on the instructions given by the Cabinet memorandum No:9/2023/PE signed by State Minister of Power and Energy D.V. Chanaka on behalf of the Minister Power and Energy.

The Cabinet has recommended that each supplier supplies 720,000 MT in 12 shipments as recommended by the Standing Cabinet Appointed Procurement Committee. It is understood that Coral Energy was providing a performance bond worth $ 5 million for eight shipments out of the 12 assigned, to be supplied during this (October 2022-April 2023) coal season.  

Combasst Industry Development had provided $ 100,000 as a performance guarantee, with four shipments out of 12 to be supplied during this coal season, subject to the authentication of documents as indicated within specific time period.

In both cases, the remaining four and eight shipments respectively of both suppliers will be supplied at the beginning of the next coal season 2023/’24.

In addition, the Cabinet has recommended to accept the price of Coral Energy as $ 240/MT (fixed) for quantities received before 5 May and to negotiate with the contractor to come to a mutually agreed index-based price for the remaining quantities based on the negotiation letters of the bidders submitted on 5 February and all relevant documents submitted by the bidder.

Further, the Cabinet has recommended accepting the price of $ 230/MT (RCI-FOB Vostocheney Index base) offered by Combasst Industry based on the negotiation letters of the bidder submitted on 5 February and all relevant documents submitted by the bidder.

If any remaining shipments are available of this contract after the completion of the ongoing unloading season, the Technical Evaluation Committee (TEC) has recommended the obtaining of the remaining quantities from Coral Energy and Combasst Industry in the next season, which will commence from September 2023.

Nevertheless, when delivering, it was Coral Energy that had supplied shipments for the season with a total of eight shipments as per the LCC at a rate of around $ 240 per MT. By this time, the world market price was around $ 144 per MT.

Coal for LVPP

The annual coal requirements for the generation of coal power are collected from October to March of the ensuing year, stored in the coal yard, and used for uninterrupted generation of power. Since the period from April to September is the off season with rough seas in the Norochcholai area, it is not possible to unload coal and the coal-carrying ships or barges cannot reach the jetty of the power plant due to the sea conditions. 

The quantity of coal carried by ships arriving at Norochcholai is about 65,000 MT. According to the plant’s requirement, it is expected that ships have to make about 35 shipments per year.

Lakvijaya in Norochcholai generates around 40-50% of the total electricity requirement of the country. The first stage of the LVPP commenced in February 2011 and the annual coal requirement in that connection had been identified as 650,000 MT. The power generation of the second and the third stages thereof commenced in April and September of 2013 respectively and accordingly, the total annual coal requirement had been 2,250,000 MT.

Next season tendering underway 

It is in such a backdrop that LCC Chairman Shehan Sumanasekara said that following the successful completion of the unloading for the season, the company had already started the tendering process for next season and arrangements would be made to proceed with onsite Letters of Credit (LCs) as against the long term contract based payment method followed by the company previously.

“When we go for credit, there is an interest charge accompanied by higher prices. We are pushing for direct LCs and onsite LCs. That is how we always procured coal before the crisis. Payment goes directly from our banks to theirs. 

“However, we couldn’t do it last time because of the forex issue. Subsequently, it was not just a forex issue, but local currency was also not available. It was a twofold problem for us. We have now resolved this and we hope we can go for onsite LCs next season. Once that happens, I hope we can purchase coal at the lowest rates in the market,” he said.

Sumanasekara stressed that once the bidding process commenced, the company would be selecting those who offered the lowest rates.  

“According to the Cabinet paper, the next four shipments for the next season have to be mutually agreed between Coral Energy and Combasst. Both companies have to agree not on fixed rates but on index-based rates. They will have to change their pricing formula from fixed to index-based for the next season,” the LCC Chairman stressed, when asked whether Coral Energy would supply coal at a fixed rate in the upcoming season as well.  

He added that the factors affecting coal prices were shipping costs and the supplier’s profit that served as an addition to the coal index price.

“Shipping prices depend on the market. The market changes due to demand fluctuations. We need geared vessels which are not very common. The majority of geared vessels are 60,000 MT. We have to get geared vessels due to the lack of facilities at the jetty. Facilities are limited – we have not invested that much in unloading,” he said.

When asked about the next tender, the LCC Chairman said the tender would most probably be similar to the previous one, but that the payment method would be changed.

“We are just finishing the unloading of our 29th shipment at the jetty. We will then start on the 30th and within the next three to four days we will finish unloading the 30th vessel as well and that will mark the completion of the season. 

“As per the CEB, the 30-vessel requirement has been met. This is up until September for the continuous operations of the Norochcholai plant. They needed 30 vessels and we have supplied this despite all the issues. This is definitely an achievement given what we went through. Now we are just starting the process for next season,” Sumanasekara added.