India’s coal production to drop, prices to increase; power companies may feel the heat  

January 5, 2011

A risk of shortfall in production targets, the proposed pay revision for Coal India, and increased share of washed coal may put upward pressure on coal prices and put power companies at the losing end

Black gold is about to become dearer. And the ramifications are going to be felt all around.

In a report to its institutional clients today, brokerage house CLSA said that it had met with the chairman and managing director (CMD) of Coal India Ltd (CIL), Partha Bhattacharyya, in Kolkata. "The CMD highlighted the risk of a shortfall in production targets due to a moratorium enforced by the Ministry of Environment and Forests (MoEF) in giving clearances for mining projects in critically-polluted areas. Coal prices are likely to go up in FY12 with the impending pay revision for CIL, which is due in July 2011. With CIL planning to increase the share of washed coal in the overall mix significantly over the course of the next few years, the fuel bill would rise even further for coal companies. The companies in our coverage which are best placed to handle this risk are NTPC (National Thermal Power Corporation), Tata Power and JSPL (Jindal Steel and Power Ltd)."

CLSA points out that the frequency of coal-price hikes by CIL has increased, of late. After a hike in FY01, it had gone in for a hike only in FY05 and subsequently in FY08. However, it hiked prices in FY10 by 11%-another price hike is expected in FY12.

Due to the MoEF moratorium till 31st March on the consideration of environmental clearances for projects which are in critically-polluted areas, CIL expects its FY11 and FY12 production to fall short by 16 million tonnes (MT) and 39MT, respectively.

Again, CIL is increasing the proportion of its washed coal output-it will hike 40% of its total output by FY17. "Washing leads to a 20% volume loss-which would result in a $2/tonne additional cost, an approximately15% increase in CV, 6% reduction in ash and around 100% increase in realisations. CIL plans to price its washed coal at 15% discount to imported coal-adjusted for the quality of coal," Mr Bhattacharyya said.

Another factor that will put pressure on coal prices is the availability of rakes-according to the brokerage, CIL had asked for 185 rakes per day, but the actual availability of rakes varies from 170-190 per day.

To conclude, the report says that with CIL's production likely to be down by 3.5% for FY11 (vis-à-vis its target) the companies dependent on coal linkages will either have to import more coal to meet the shortfall or will have lower utilisation rates. Those power companies that don't have a pass-through of fuel costs in their PPAs (Power Purchase Agreements) would see a hit in their profitability, because a higher proportion of washed coal in the overall coal output would imply higher input costs for power utilities.

The brokerage adds, "The most exposed (companies) are Adani, Jaiprakash Power, Sterlite Energy and CESC (Ltd)."

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)  — Munira Dongre